My Presentation at The 2007 Racing Symposium!!!
Good morning,
Before we get started:
I’d like to thank Doug Reed, The University of Arizona, and all the students in the Racetrack Industry Program.
I would like to thank everyone for attending and I am honored for this opportunity to give some of my views on racing.
I have prepared a folder of material that covers many of the issues we are facing and some of my thoughts on horse racing. I encourage everyone to take a folder, and if we run out I will be happy to mail you one. At the conclusion of my presentation I look forward to taking any questions you may have.
I would like to start off by talking about MacDonald’s corporation, which happens to be a DOW 30 Company. Back in November of 1999 MCD stock price was above $48/share. In March of 2003 MCD stock price hit a low of $12/share. WHAT HAPPENED?
Every quarter MCD had excuse after excuse why they could not meet expectations, and their stock price reflected this.
1. The general market was in a downturn, but Wendy’s stock appreciated 20% during this same time.
2. Currency exchange rates were unfavorable, but most multi-nationals were not affected.
A few years ago MCD spent $5M on a study to get customer feedback. What they learned was that they had forgotten how to treat the customer. They had stopped saying words like Welcome, Thank You and Please Come Back Soon. In short they had forgotten how to be friendly and courteous.
Since March of 2003 MCD has improved their Customer Service, their Product and their stock has risen from $12/share to a high of $60/share. What MCD did was:
RECOGNIZE WHAT YOU NEED TO DO, THEN DO IT. THAT IS THE ESSENCE OF HIGH PERFORMANCE
I use the MCD story to make this point: MCD had all of these excuses why they could not meet expectations. When they stopped making excuses and took a close look at themselves, then they EXCEEDED expectations!
Our industry needs to do the same, take a hard look at ourselves and:
RECOGNIZE WHAT WE NEED TO DO, THEN DO IT. THAT IS THE ESSENCE OF HIGH PERFORMANCE
Next I‘d like to talk about the NYSE and what I believe is an industry with many parallels to our industry. I have included in the folders an insightful paper, “Reflections on a Lifetime in the Securities Industry” written by By William C. Freund P.H.D.
Dr. Freund Joined the NYSE in 1968 as senior VP and chief economist – He spent 20 years at the exchange and witnessed many of the dramatic changes that have helped to make the exchange what it is today.
Also in 1968 the government began questioning the entire concept of fixed commissions in the securities industry. The DOJ submitted a statement to the SEC questioning the anticompetitive effect of the NYSE fixed commission rates, and asked the SEC to investigate whether fixed rates were justified. A federal court of appeals ruled in 1970 that the NYSE was required to justify its prohibition on commission rebates.
When it came to adopting rules that would allow for rates to be set competitively in the marketplace Dr. Freund cites (and I quote)
“The NYSE’s members failed to understand the immense power of competition and that they could no longer stem the powerful tide of competition. In the end, good economics has a way of prevailing over artificial price fixing. By 1975, after extensive hearings, the SEC declared rates fully open to competition.”
The argument made by those opposed to competitive pricing was that it was an industry with such heavy fixed costs that competition would lead to “destructive competition”, leaving only a few monopolistic survivors. These are the same types of arguments we are hearing in our industry today.
According to Dr. Freund the NYSE spent over a million dollars on their economic consultants, a fee they earned by delaying fully competitive rates for nearly 7 years. But before the battle was lost, the clear-thinking president of the NYSE (Bob HAACK) had had enough.
Here was the president of the NYSE attacking fixed rates as an outdated anomaly that could not continue because it was not in the best long-run interests of the securities industry itself.
His expectation that the industry would benefit from competitive rates was vindicated by subsequent events. New competitive opportunities arose for markets and firms as a result of competition. The industry discovered new ways to enhance productivity by automating processes, streamlining the clearing and settlement of security transactions, and generally reducing unit costs. New competitive ideas proliferated.
Let’s take a look at the history of the NYSE.
The NYSE increased its non-member commission rates 5 times between 1934-1965
I feel that this is similar to what we are seeing today in our industry as track fees continue to escalate.
In 1975 the NYSE began changing the way they did business and FIXED COMMISSIONS were abolished.
Since then they have experienced spectacular growth in volume, which would be the equivalent to what we call, handle.
Over the past 40 years the NYSE has made many changes to create a better trading experience and to bring the price of trading down. Some of the changes they made in addition to abolishing fixed commissions were the major modernization of the trading floor, introduction of electronic trading, trading in 16ths and then to decimal pricing.
Let’s take a look at the growth that these changes created:
* 1961 average daily volume exceeded 4M shares
* 1982 1st 100M share day
* 1992 Average daily volume surpasses 200M shares
* 1997 Volume Tops 1 Billion shares
* 2001 Volume tops 2 Billion shares
* 2007 Record Volume day over 4,1 Billion shares
Even with the phenomenal success that the NYSE has enjoyed, they missed an even bigger opportunity that was virtually handed to them.
One day a Wall Street Journal reporter presented the idea that options should be standardized and traded like stocks. At that time the NYSE had a shortsighted and conservative individual at the helm, a poor leader who rejected the idea - - equating it with turning the NYSE into a LV style gambling casino. He even went so far as to forbid the research department from studying the idea.
The idea was however adopted by the CBOT soon after. The result was that options trading on the CBOT reached the point where it exceeded the volume of the NYSE. The NYSE later realized their mistake, but it was too late. The CBOT already had the liquidity and best prices as determined by competition. The NYSE missed the boat because the chairman lacked vision.
One area where Racing may be missing boat is betting exchanges. Unlike the NYSE it may not be too late.
I have been a fan of horseracing for over 35 years and I am involved in many capacities as a racehorse owner, farm owner, breeder and player.
Being passionate about racing I can’t help but feel a growing anxiety about the state of racing today and the challenges it continues to face.
As I see it, horse racing today is a complex industry, which is arguably in disarray. Our industry is uniquely complex and diverse. Our industry consists of many segments: Racetracks, OTBs, Tote companies, Breeders, Owners, Jockeys, Trainers, Drivers, Regulators, and Bettors, all of whose interests are often misaligned. Not to mention the fierce competition between states attempting to increase their share in the Horse Racing and Slot Machine Market. Legislatures are juggling the interests of racing against other interests, and the public who have varying levels of interest and opinion regarding horse racing.
The main point I’d like to make this morning concerns what I see as the key challenge facing the industry, and that is, in this new online world, horse racing is increasingly forced to face direct competition from other forms of gambling which from a wagering perspective provide a better deal for the player. A larger and larger proportion of gambling in general is taking place online, in a more competitive environment than we are used to or know how to compete in. In general there are just more choices available for the entertainment and gambling dollar.
Horse racing is facing a growing pressure from market forces which are forcing it in a direction we might not be ready for, and these forces are not going to go away. I think these pressures will continue to persist until we make favorable market changes.
While we have traditionally seen ourselves as an entertainment business, our revenue stream depends on gambling customers choosing to place wagers with us, and as other forms of gambling and other forms of entertainment provide a better return, more and more customers are choosing to spend their gambling dollars elsewhere. The gambling customer today is a lot less interested in the entertainment and spectacle of racing, and more interested in getting value for his gambling dollar.
The key question I’d like to ask is, should the horse racing industry think of itself primarily as an entertainment experience or as a betting market? I think the answer has become more and more obvious, that it’s a betting market. Some of the reasons I have this opinion are as follows:
1. Horse racing, with few exceptions, is in decline as an entertainment industry. Well-run financial markets on the other hand enjoy tremendous success in a free capitalistic environment. (See NYSE Timeline)
2. The glaring exceptions to the decline of horse racing are betting exchanges, which are run more like a financial market.
3. The information that we disseminate is similar in character to the information that financial markets disseminate.
4. The wagering part of our industry has been billed as “the thinking mans game”, similar to a financial market.
5. The amount of dollars our industry needs will not be met by advertising our wagering pools as a form of gambling entertainment.
6. Opening and advertising our pools as financial markets will attract large risk capital and will grow handle and revenues at a much faster rate than trying to win over one $2 bettor at a time.
7. If we treated Horseracing more like a financial market, more trading instruments could be developed which in turn would attract more handle and revenue.
Our Industry has many facets and many problems with no leadership to guide us through the troubled waters that lie ahead. Many of the people that have the power to help make the changes our industry needs to insure its longevity seem to have their own agenda, or simply put, are uninformed. I believe the true solution involves a total makeover from whom do we welcome as owners, trainers, jockeys and drivers to how we are going to fund and grow our sport.
I would like to interject this thought: CHANGE YOUR THINKING AND YOU CHANGE YOUR WORLD
As I have said there are many challenges facing our industry. Many of these are covered in the handout. We will certainly explore some of them further on Thursday during the “High Volume Customers“ panel. For now I would like to touch on a few areas that are of particular importance to the future success of our industry.
Drugs: I believe this is our number one concern. For any financial market to flourish, integrity of the product is critical.
We cannot expect our sport to grow until we get our integrity back. We need to be serious about enforcing our drug rules.
We need a uniform drug policy that enforces uniform fines and penalties towards violators. If we don’t get the drugs under control we will drive out many good owners. When a trainer chooses to use drugs he cheats other owners, trainers, and bettors out of their rightful money.
One idea would be to set up a national drug-testing laboratory that would be privately owned and operated. The private sector would bring costs down, bring uniformity, and be more thorough than state run programs.
People who choose to cheat should be heavily fined (up to $500,000)* and be suspended from the sport or barred for life when warranted.** Until we send a real message the public will not come back in any meaningful numbers.
*My thoughts on fines of this magnitude would be that they should apply to repeat offenders using banned substances. We could guarantee that large fines would be paid through an assurance bond or a personal guarantee. Since the first offense would be substantially less, non-offenders would not need to provide this large of a bond or personal guarantee.
** Having a uniform drug program would make everyone aware of the penalties involved and as a last resort a lifetime barring would eliminate the habitual offender.
Withholding taxes: Withholding taxes are a huge drain on our handle. Money that could otherwise be reinvested is taken out of the pools. Between the drain on the handle and the cost to implement this procedure it costs horseracing countless millions. This drain is accelerated further in states where they impose an income tax. Our industry has shown the ability to have exemptions and special privileges in the eyes of the state and federal government. Obviously our industry has the ability to reach lawmakers at the state and federal level. It would behoove us to revise these withholdings so as to not affect handle quite so adversely.
Increasing handle: Field size, quality of fields, number of race days, takeouts, critical mass in the pools, integrity in our sport, and number of betting outlets affect our handle positively or negatively. Our industry continues to employ strategies that affect handle negatively. If our industry’s goal is to increase handle (which in turn will increase revenue) employing the above variables in a positive manner can only increase handle.
Increasing Revenues: It has been suggested that handle is no longer relevant when evaluating the success of racing. Although revenues are the ultimate goal of any business, racing must continue to realize that handle is ultimately the engine that drives the business. Correct pricing is essential for the success of our sport, but actions that limit handle are ultimately doomed to limit our potential success. Since the traditional fan base of racing is declining, racing must look for new sources of revenue. Like the NYSE racing may find that greater success can be achieved by having a Smaller piece of a Much Much larger pie rather than trying to find ways to squeeze out every penny from a shrinking pie.
Rebates: “A deduction from an amount to be paid or a return of part of an amount given in payment.” In our industry a rebate is money given to the bettor that otherwise would have been the operator’s profit. Rebates offer a HUGE incentive for bettors to wager and wager more than they otherwise would normally. Rebates have brought gigantic new money into our pools.
One example of new money is myself - - I am directly responsible for over 2.4 billion in handle since Jan of 2000 and have conservatively paid over $100 million in fees to tracks and horsemen. 100% of this is NEW money that would not otherwise be in the pools at any level.
If racing wants to attract new customers raising takeout and fees is not the way to do it. I can honestly say that if the current environment of pricing and hostility to the mega player existed when I started I would not have put forth the time and effort to even get involved. Although discouraging competition for me may be in my best interest, it is not in racing’s long-term best interest.
Batch wagering: Batch wagering (as I understand it) is grouping more than one wager with a single command and all of the wagers that were in the batch are made at one time. Batch wagering is a technological tool used by horse bettors that allow them to get in multiple wagers quickly. Batch wagering has been offered to everyone for years in the form of box and wheel wagering (see my paper “Effects of Box Wagering in a Trifecta Pool”). Tote companies offer technologies that allow players to make multiple wagers that are not boxed or wheeled. The players currently using a form of this technology give the racetracks many more wagers. Further this enables the player to wager at many more tracks.
A major misconception about batch wagering is the belief that it is the cause of late odds changes. In reality it only takes one large wager to affect the odds of any given runner.
Furthermore the efficient processing of wagers does not give anyone any better opportunity to pick winners. In fact reduction in the efficiency will only force the Mega Players to limit their wagering to their best wagers.
If our industry fails to provide efficient ways to wager, handle and revenues will certainly fall. It is totally inconceivable to me why our industry continues to discourage technology, innovation, handle and revenue. Even McDonalds offers a form of batch wagering called “batch ordering”. Instead of the customer having to say give me a Big Mac, large fries, and a medium coke, with “batch ordering” we just need to say I’ll take a #1.
A Level playing field: This seems to be the buzzword of the decade. Racetracks are falling all over themselves to get into this brand new unproductive non-revenue producing business model. Racetracks seem to believe that it is their job to insure that all customers have an equal chance in losing less than the takeout. So whoever appears to be doing well will need to be handicapped and those not doing as well will need new advantages. What is conveniently missed here is that the customer who does well is a customer that gives the highest handle. This has to be the only industry in the world that wants to punish its best customers and reward its worst.
Taking wagers from a facility that has no investment in horseracing: This is an interesting topic that keeps being thrown about. Does a dog track or Jai Alai Fronton have an investment in horseracing? Do Nevada casinos or NYCOTB have an investment? If so, is their investment large enough to count? What is the point to all of this? Is their money not green or do we need to have a dual-pricing model? Racetracks will charge each other super low fees because they all have an investment. Track A cost $1M back in 1896 to build and races 30 days a year. Track B cost $250M to build in 1993 and races 300 days a year. I guess they both have an investment. The Hilton Hotel in Las Vegas spent $20M to build their race book and races zero days a year. Do they have an investment in horseracing? Youbet invests millions in software that services racing customers at a level never achieved before. Does Youbet have an investment in horseracing? An SPMO brings new customers to our industry, employs 50 people, builds the infrastructure necessary to provide a high level of service, reinvests most of its profits to its players, and pays hundreds of millions in fees. Does this SPMO have an investment in racing? Consider a customer of this SPMO who has paid over $100M in track fees, invested $5M in a farm, spends millions on horses, and directly employs 50 people in his horseracing/breeding operation. Does this customer have an investment in horseracing? Should Thoroughbred racetracks give Harness racetracks the same fees they give themselves and vice-versa or are these just two competing industries? I’d like to think that all of us are in this together. We need to unite our resources for the betterment of the industry. Together we could form a strong base and bring horseracing back to the levels it once enjoyed in prior years.
Good economics has a way of driving out bad policies.
It was Winston Churchill who said: “Americans always do the right things – after they have exhausted all other alternatives”.