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Anticipating a high-tech gold rush
Ron Luniewski, the chief operating officer of Youbet.com, the interactive horse racing betting company, lives and works in Woodland Hills, Calif., 45 miles north of Los Angeles. He is an avid horseplayer, but he hardly bets during the week.
"For me to make a bet, I have to drive 90 minutes one way through all that traffic," Luniewski said. "Come on. A weekday? I'm not going anywhere."
Such is the plight of the horseplayer in California, where traffic snarls and urban sprawl combine with a cumbersome, old-fashioned system that limits the number of places where a racing fan can make a timely bet. There are only 34 betting sites in California, the country's most populous state with 33 million people - or roughly one site for every 970,000 people. It is something of a curiosity, then, that Californians bet more on Thoroughbred horseracing than the residents of any other state - $2.6 billion last year - despite the lack of a sophisticated and widespread betting system.
That will all change on Jan. 1, when rules legalizing telephone and Internet gambling on racing are expected to go into effect. In an instant, the distribution system will expand from 34 far-flung sites to more than 15 million households. At the same time, restrictions on the number of simulcast races that can be imported each day are also expected to be lifted.
In anticipation, gambling companies are lining up like modern-day 49ers. Scouring a first draft of regulations while massing at the border are Television Games Network, the 24-hour broadcast network supported by the National Thoroughbred Racing Association; Magna Entertainment Corp., the iconoclastic operation run by Frank Stronach; Youbet.com; and other gambling operations.
But until the final details of the new rules are worked out by the California Horse Racing Board, no one is certain how the system will work and which companies will prosper the most.
"It's all wild speculation," said Craig Fravel, the executive vice president of Del Mar Thoroughbred Club, just outside San Diego. "But I will tell you this, because my [chief financial officer] keeps reminding me: In 1988, we went from a live venue that showed no races other than our own to a live venue with about 20 offtrack locations throughout California. Within one year, our revenues and our purses doubled. Now we have the opportunity to go from about 20 offtrack locations to 15 million homes. I'm excited."
Regulations drafted by the California board have been submitted for public notice and will likely be approved on Nov. 30. The board can revise the rules before the Nov. 30 approval date, and then several administrative agencies that hold veto power will review the rules. As a result, officials at account-wagering companies are reluctant to talk about how they will operate or to provide revenue projections.
California residents are already placing bets over the phone, despite some questions over the legality of the practice. Winticket.com, for example, an Ohio-based Internet betting service, has been taking bets from California residents for a year, although it does not allow the state's customers to bet on California races.
Among the companies not taking wagers in California is Youbet, which was targeted by the Los Angeles County District Attorney in late 1999 for possible violations of state gambling laws. Early in 2000, the company cut off California customers as part of a settlement with the district attorney. Youbet officials said they are trying to renegotiate the settlement to allow them to begin taking bets on Jan. 1. Youbet said it still has 2,500 California customers who have not closed their accounts.
Youbet's status is one of several important concerns to gambling companies and racetracks in California. Another is cannibalization, the term given to describe the shift of bets from local races to out-of-state signals.
According to racing officials, the account-wagering regulations being considered would allow companies to offer an unlimited number of races to California bettors. Current simulcasting rules cap the number of imports at 20 races a day at the 34 wagering sites. That increase in options could lead many bettors away from races in California.
As a backdrop to these changes is a long-running conflict between Magna, which owns three California racetracks, and Television Games Network. TVG, which is owned by telecommunications giant Gemstar-TV Guide Inc., has exclusive agreements to broadcast and take wagers on races from Hollywood Park, Del Mar Thoroughbred Club, Oak Tree at Santa Anita, Los Alamitos, and Fairplex Park. The network plans to begin taking wagers from California residents on Jan. 1, chief executive officer Mark Wilson said.
Magna, which owns Santa Anita Park, Golden Gate Fields, and Bay Meadows Race Course, has a telephone betting system in Pennsylvania and plans to offer telephone and Internet betting in California on Jan. 1, officials for the company have said. But Magna's officials have declined to provide details about the operation, including how many out-of-state tracks the system will offer, how its Internet system might work, or whether the company's Pennsylvania phone system will be incorporated into the new operation.
What appears to be certain, however, is that Magna will not sign an agreement with TVG, whose marketing ability will be weakened without the signals from Magna tracks.
"I'd love to see Magna on TVG, as I would suspect many of the fans, owners, breeders, and anyone else who cares about the sport would love to see," said Wilson. "But we haven't been able to come to terms."
Magna's strategy of going it alone appears designed to build both revenues and market share in California. In the first three months of the year, Magna's two winter racetracks, Santa Anita and Gulfstream in south Florida, dominate the simulcast market. In addition, Golden Gate Fields will be the only track operating in northern California. So the only place for telephone customers to place bets on those signals would be through a Magna system.
"In a perfect world, it would be great to have all the tracks on one system, kind of a one-stop shopping," said Greg Avioli, the deputy commissioner of the NTRA, the sport's national marketing unit and one of TVG's biggest supporters.
Despite cannibalization fears, horsemen have generally supported the account-wagering legislation because of a provision in the law that provides them with a percentage of the money bet. The practice, called a source-market fee, was initially developed by TVG and has now been adopted by most account-wagering companies.
Wilson said that tracks would receive a worthwhile trade-off from TVG for any cannibalization that occurs - broad distribution on cable and satellite systems. TVG retains 5.5 percent of every wager, constituting the vast majority of its revenues. Under California law, account-wagering vendors are allowed to keep a maximum of 6.5 percent of any wagering dollar.
"For 5.5 percent, TVG is building a much bigger, much better-developed distribution system, one that can be set up in anyone's television set," Wilson said. "That is a quantum leap forward over what exists right now."
At Hollywood Park, Rick Baedeker, the president of the track, cited TVG's television strategy as the chief reason that Churchill Downs, Hollywood's parent company, favors TVG's approach.
"The answer is simple: distribution of the picture," Baedeker said. "Churchill Downs or any other vendor would not have the clout to distribute the picture to cable companies or to the Dish Network or to DirectTV. Without that, what have you got?"
Even with Hollywood's signal limited to TVG and Youbet, which has a marketing agreement with TVG, Baedeker said the future looks good.
"We're about to become a television product, rather than an event product," Baedeker said. "This is going to allow us to take our product to the marketplace, rather than requiring the marketplace to come here. It's such a huge edge. What it's going to do for racing - to be able to reach out to the people of Los Angeles - is just incredible."