Racetracks, Bettors, the Internet and Television

12 February 2002

California account wagering is finally here, and the advent of this long-awaited home betting market is a good reason to take a look at where, exactly, U.S. horse racing is in the larger scheme of things.

Two studies that do just that are conveniently to hand: landmark surveys of big horse players and account horse race wagering operations in eight foreign countries conducted by the University of Arizona Racetrack Industry Program (RTIP) in conjunction with Bear, Stearns and summarized in a January 2002 Bear, Stearns report ("The Global Account Wagering Industry"); and a Milken Institute study of the effects, mostly bad, of regulation on the horseracing industry by Louis A. Guth and Michael D. Shagan (The Milken Institute Review, Third Quarter 2001). The University of Arizona Racetrack Industry Program and Bear, Stearns put their finger on racing's problems; Messrs Guth and Shagan show why those problems are hard to fix.

First racing's problems (always remembering that in business someone's problems are usually someone else’s opportunity).

Racetracks, the Internet, Television and You

Bear, Stearns highlights an on-going structural change in the racing industry's point of sale. When the industry's senior executives were getting their first jobs the point of sale was the racetrack: its pari-mutuel windows for wagers, its gate and concession stands for non-pari-mutuel revenues. Once you paid for admission you could sit in the grandstand, see horse races and bet on them--the only way, in those far-off pre-television days, you could see horse racing. Track executives had total control over access to the sport and legal wagering on it; the mindset of that comfortable set of circumstances persists in industry management ranks today.

Then came television. Football, baseball and the other spectator sports embraced it. Racing declined. Tracks wanted to retain control of access to their sport; racing and television went their separate ways.

Then came off-track betting (OTB). OTB and the telephone deposit account wagering services that came with it shifted the horse race wagering point of sale away from racetracks to OTB parlors and living room telephones. In 2000 OTB and telephone betting handled around $7 billion, or nearly 40 percent of aggregate wagering on U.S. horseracing.

Then came the Internet. Racing's point of sale moved again, to personal computers located in homes, offices or wherever laptops go. Following close upon came interactive television (ITV), slow to penetrate U.S. households but a steamroller gathering speed in France, the U.K. and other parts of the globe. On the horizon lie wireless applications devices, mobile phones and digital assistants, which will extend racing's point of sale to just about anywhere a bettor happens to be.

And finally, half a century late, comes television coverage of everyday horse racing. You can see races on domestic television today if you live in a household with access to TVG, the Gemstar/TV Guide ITV betting service, or if, as is true for many New Yorkers, your local cable operator carries track monitor signals in conjunction with a local OTB operation.

What’s Left for the Racetrack?

Racetracks haven't changed much, physically, since their management started their careers but the environment they operate in has changed totally.

The percentage of bets transacted away from track pari-mutuel windows is approaching 50 percent. Add in simulcasting to other track facilities and this percentage rises sharply. Horse race wagering has been effectively decoupled from live racing. Even more seriously, as Bear, Stearns observes, the proportion of wagers made at OTB parlors is falling while the proportion of wagers made in living rooms is rising: the industry's point of sale is shifting to the home. The continuing growth of Internet e-gambling will only accelerate this trend. Broadband, which appears to be taking off at last domestically via cable modems, will put this trend into overdrive.

And television coverage, or broadband Internet coverage, of everyday horse racing will improve, making tracks increasingly into television studios and track owners and horsemen into the content-owning counterparts of the owners of other spectator sports.

A Changing Consumer Base

The University of Arizona Racetrack Industry Program bettor survey--administered to 14 larger horseplayers--throws the segmented nature of the racing fan base into sharp relief. RTIP identified big ("Class A" players who wager anywhere from $15,000 to $150,000 a week; serious ("Class B" bettors who wager smaller but a still substantial amounts, $10,000 or less a week; and "average" ("Class C") bettors who wager much smaller amounts--the $2 bettors the industry used to think of as their core constituency.

It is abundantly clear from the RTIP survey that Class A players bet at home. It is more convenient. The choice of races is much greater. Services, racing information and especially rebates of losses, are not only better than track offerings but a normal consumer expectation today in this segment of the market. Class A players are online, not at racetracks. Broadband when it comes will keep them there.

But online platforms, even in a broadband world, can't match television as a way of attracting new fans to racing considered as a spectator sport. Nothing can match television in this regard and nothing is likely to in the foreseeable future. But betting is intrinsic to racing's appeal. (Betting is intrinsic to the appeal of all spectator sports, but is conducted illegally outside Nevada, Wire Act or no Wire Act) and for televised racing to have the domestic impact it has today in the United Kingdom widely available, simple-to-use ITV betting platforms are essential.

Racing's Regulatory Bind

This brings us to Messrs. Guth and Shagan. With acute perception they point out in The Milken Institute Review that the regulatory régime that States erected around racing in the long-vanished days of its effective monopoly on U.S. gambling is dysfunctional in a world that has changed out of all recognition.

Racetracks are not free to go into domestic online markets and offer services to Class A players, or to Class B players or the uninitiated public, that are competitive with the services offered by offshore services that in too many cases return nothing to the sport (meaning nothing to the horsemen who put on the show).

Racetracks are not even as free as their gambling competitors, lotteries and casinos and Indian tribes, which operate under regulatory regimes that because they are of more recent origin are more adapted to the world we live in. Businesses that are part of racing, like TVG and YouBet.com, are hampered by the same dysfunctional regulations.

The problem Guth and Shagan identify has to be solved before the racing industry executives can address the business problems--product distribution, shifting points of sale, customer service and the rest--in an effective fashion. The racing industry is indebted to Frank Stronach, the founder of Magna Entertainment, for calling attention to racing's regulatory hamstrings and making their removal an industry priority.

It won't be easy. State law and regulation is hard to change. But the world changes easily and inexorably. Continued growth in online gambling is as certain as tomorrow's sunrise--and tomorrow won't wait.