08/28/2009 11:00PM

Breeders' Cup agent of change


Satish Sanan wanted a cup of coffee, so he got in line at the snack bar at Fasig-Tipton's Saratoga sales grounds. The snack bar is in an area that was recently renovated by Fasig-Tipton's new owner, a deep-pocketed investment firm associated with Sheikh Mohammed al-Maktoum, the ruler of Dubai. Frustrated after it took 10 minutes to get through the line, Sanan threw up his hands as he walked away and said, "I've already told them. They need to fix that!"

That's pretty much Satish Sanan. A fabulously wealthy entrepreneur, he has spent an estimated $150 million on his Thoroughbred racing operation since entering the game in 1997, and races under the name Padua Stable. He never shies from expressing an opinion no matter what he may be criticizing, especially if he considers the target to be inefficient. Over the years, he has applied those attributes to some thorny problems in Thoroughbred racing, including protections for buyers at horse auctions. Recently, he has taken a more active role on the board of Breeders' Cup Ltd., which is struggling to address a multimillion dollar budget deficit while answering criticisms from some industry stakeholders. In his new capacity, Sanan, 61, chaired a strategic planning committee whose job was to develop recommendations to take the organization 10 years into the future.

In early August, Sanan talked extensively with Daily Racing Form reporter Matt Hegarty about the need for Breeders' Cup to modernize, stick to its strategic plan, and perhaps even pare some races from its season-ending 14-race two-day event. Stressing that he was not speaking on behalf of Breeders' Cup, Sanan commented generally on how the organization and the industry should tackle their myriad problems.

The following is an edited transcript of the discussion.

DRF: You've said that you believe that there's additional revenue out there for Breeders' Cup, as far as sponsorships and the wagering side, and the strategic plan prepared by your committee discussed that possibility. How do you think Breeders' Cup can increase revenue?

Sanan: If you're going to look for additional streams of revenue or alternative streams of revenue, you have to examine what we are doing today, and whether you should change it, and how you should change it. The most important thing to do is to look at how our industry has changed over the last 20 years and where it's going. We're looking at a five-year or 10-year strategic plan, and to do that, one has to gaze into the crystal ball and look at where the racing industry might be, how Breeders' Cup is going to be more successful as part of the overall industry, how the global markets and how the racing markets are going and how they are developing, and last but not least, an area that I think we really have to focus on is how technology is going to be used in Thoroughbred racing, be it at the racetrack, be it in parimutuel, be it in the [bet-processing system].

So today, where do our revenues come from? It's very simple. Today our revenues come from nominations - stallion nominations and foal nominations - but those revenues are totally dependent on the ups and downs of the breeding industry. . . . The second piece of the revenue is the Breeders' Cup event, and most of that revenue comes from handle. Over all, industry handle is in decline. So if we look at our business model and intend to fine-tune it or change it, then we're looking at a treadmill.

If those are the revenue streams, how do we fine-tune those and not lose sight or our mission? How do we still promote the industry and grow the revenue? I think that's a question of repackaging. The industry at large is confused in terms of our various programs during the year. We have the [Win and You're In] series, we have the [supplemental stakes] series, we have the year-end event, and yet some lead to the end-of-the-year event and some don't. . . . So the decision has been made that we are going to combine, consolidate all those things into a single series. Whether there are eight or 10 series, we don't know. The management is diligently working on that right now.

We also looked at what the track rotation was going to look like in the future, and frankly there was a lot of debate about that. We know there are not going to be 15 tracks out there. It will be three, at the most four. Again, management is going to make that decision. To make the decision on the track and the rotation you have to ensure that the strategy and the philosophy of the track operators, be it NYRA, or Churchill, or Keeneland, that philosophically and business-model-wise, that we are aligned.

Assuming we get past that, the plan is to do a long-term strategic deal with the track so that everyone knows in advance that, say, in 2013 the Breeders' Cup is going to be there, and these are the six or seven divisions, and these are how the horses can get there.

Then you get to the third revenue stream, which is the sponsorship side and the television side of it, though we actually spend money rather than get money from the TV side. But if we get to coordinate these eight or 10 series, now the sponsors have the opportunity of not just sponsoring a race on the day, but now they can sponsor a division, and they get much more exposure. Now if you put the two together and cut a package deal, if you can say that these tracks are part of the series, part of the package, then give them the opportunity to bring their own sponsors into it and give them the opportunity to share in the revenue, even if the event is not at their location, so now we are all working toward a single goal, a series that leads to the host track, the final day, and all tracks share in the revenue, all partners share. . . . That's how we are going to grow our sport.

How do you get the racetracks to be partners with Breeders' Cup, especially since it seems as if over the past couple of years that the relationships have become somewhat antagonistic?

It's getting better. It did [become confrontational]. And so to a degree over the past year, I have been an intermediary in making sure we can sit down with these people who should be our partners.

The key difference in the future is that we will be negotiating with the tracks, and we will be able to say, "Do you want to be a partner in the whole Breeders' Cup program for the next 15 years? Here is the model, and tell me how you want to enhance your value, how you want to enhance your profitability." So it will be a collaborative process.

Does Breeders' Cup know how that model will look yet?

Management is in the midst of putting it all together, developing a long-range plan [and] how these different models might look, translating it into a long-term financial plan, seeing if we can have various assumptions documented. We'll run it through various financial models and see what it looks like, and, candidly, if it's not coming out of the gate, then it may be that we have to spend more money before we start making a lot more money. Those are the things that we haven't gotten to yet. We're going to analyze that, sit down with the management, and if we have to find a creative way of shoring up our reserves of $30 million or more or raise some money, then that's another challenge that we really have to look at it. Because if we're going to do this, then we have to do it right. We have to do it strategically. We can't just say here's a great plan, but we are worried about spending $5 million. Things don't work in practical business situations like that.

Isn't that the problem right now? You're talking about getting more sponsorship dollars, yet Breeders' Cup has slashed its television budget, and as a result, there aren't as many races on television any more. Sponsors are going to want more exposure, not less. . . .

I agree with you.

So what do you do in an economic climate like this, and when Breeders' Cup is so financially constrained?

You stay with your program. You put together a long-term strategic plan, and you don't say that because conditions might change one year, we're not going to do it. Conditions will always change. If you're going to build a television audience and simulcasting revenue and exposure, then you need TV and you need digital marketing, and you need to stay with your long-term program, and you need investment. You can't accomplish these things without making strategic investments.

A lot of times we get too much pressure from our constituents. This is just my opinion. We end up changing our decisions, and those are not always, in my opinion, the right decisions.

What about the Breeders' Cup [simulcast] signal and the rate that the organization charges, which is currently 50 percent of the takeout? Has Breeders' Cup considered adjusting that rate to raise more revenue?

Breeders' Cup was reluctant to look at that. Let me kind of change the topic and then answer that in a second. . . . We made a lot of mistakes when we started in 1979 as far as simulcasting, how we negotiated deals, and also when [account-wagering] came on. And people say, "Well it's hard to change." Well, if we don't change, then we are going to stay on this treadmill and we are going to decline. So that means that we have to look at it. If we look at the Japanese model, which I think is the best in the world, they had similar issues - too much product, too many races - so they formed the [Japan Racing Association] and the [National Association of Racing], almost like a league, and they bet more than 20 times what we bet in a year, and they manage it very well. Their handle is enormous.

But there's a reluctance to look at this issue in the U.S. And that's because when you sit in a boardroom, you have competing entities, and it's not in their short-term interest to do those things, and I underline the short-term, because I go back to what I said earlier, it's the philosophy. Churchill's philosophy, I would say, is totally different than NYRA's philosophy and Keeneland's philosophy and Oak Tree's philosophy. But to be partners you must be aligned. . . .

So we have to all get together, so that we can examine this model, and then we can change it. That is the only way that we can fix the long-term viability of our industry, and enhance the long-term viability and success of the Breeders' Cup, and the rest of the industry. One thing people do not realize is that we end up talking too much in isolation. We talk about the industry, we talk about the decline in handle and the decline in attendance, and then we talk about the sales and why the sales are declining, but our revenue cycle is all connected. It is tightly coupled. Anything that happens at the racetrack feeds back to the breeding industry, feeds back to the stallion industry, feeds back to the sales. So whatever we do, we have to do it in such a fashion that we focus on growing our business, growing our customers, getting more racehorse owners and buyers, and taking care of our key customers, which are the [bettors] and so on. And we do marketing, the way it needs to be done. I believe that the nucleus of all that has to be fixing the revenue model.

And how do you fix that revenue model?

Number one, we have a presence in Washington D.C. We don't even have to go to all 37 [racing] states or what have you, so there is one simple answer: You go to Washington and you say 50 percent of that revenue from parimutuel wagering goes to the host track. And that the bulk of that should go into the purses. The rest, frankly, it's a free market. If Churchill wants to give rebates or give a break to a Thoroughbred track, to a dog track, or a harness track from their portion, let that be. You cannot mandate that.

Are you saying that you would go to the federal government and mandate that through a change in the Interstate Horseracing Act?

Yes, you would change the IHA. We've changed it already a couple of times. And it's a very minor change to the IHA.

There's a lot of reluctance from the racing industry to change the IHA. Why do you think the industry would support that now?

I think they would. We've talked about it. We need to talk about it more. We need to examine it. We need to look at the political and legal implications of it. We need to look at the [antitrust] issues. By the way, these are being examined. This is a hot topic right now. This is at the heart of the issue of what needs to be fixed.

You'd need the entire racing industry on board for that, which brings up another topic: Considering that only 40 percent of the organization's revenues are provided by the breeding industry, is it time for the Breeders' Cup to think about expanding its board to other facets of the industry, such as racetrack management?

We should. This is again a personal view, but I think in the past and to a degree now the board has been constituted with mostly Kentucky breeders, with myself and Rich Santulli as the outsiders. But even if you are not going to reconstitute the board, the governance needs to be looked at. If we're going to look at a technology plan for the next 15 years, I'd form a small advisory committee of the best people in our business to do that, because there are experts out there that we don't have. We probably have to form little advisory groups on three or four strategic initiatives, make sure we get that input.

Going back to Breeders' Cup's financial situation, it's estimated that nominators are going to contribute $16 million to the organization while purse distribution is going to be $30.5 million this year. Contributions from nominators used to be roughly equal to purse distribution. How did that imbalance come about?

We never sat down and meant to do that. We made decisions as we went along because our investments were doing well - it had grown to about $38 or $40 million. Unfortunately, that has gone down a little bit, and eventually, Breeders' Cup has to get away from being dependent on foal nominations. We need to give more money back to the breeders. We should be so successful that we don't have to rely on the breeding industry [for revenues]. So I think eventually if we would get it, we should get away from that stream of revenue and get more from the event.

If that's the case, then why should breeders be involved in the management in the first place? That would remove their entire stake in the program.

But the Breeders' Cup should support the breeders and the breeding industry at large. It goes back to the cyclical nature of our revenues in the industry, where each part supports the other part. As part of the long-term strategic plan we ought to be looking at it. This year, we reduced the nomination fee to $400 from $500 if you nominated by a certain date and online, and we had a pretty good response. So if the revenues grow, and the nominations become an insignificant piece of it, why would we worry about it?

Are you saying that the structure of nominating horses to the Breeders' Cup - the idea that horses who have been nominated are the only ones eligible to earn Breeders' Cup purses - may go away in the future?

I would predict that. Because the thing we are doing is very simple. The people like me, on the stallion side, we pay 1 1/2 times the stallion fee, or two times - it's a multiple of the stud fee. One way to look at it is we could tweak that multiple, so that any horse that goes to one of those studs is automatically nominated. . . . Look at the burden on us for the foal nomination program. How many transactions do we have to process with all these foal nominations? I'm not saying this fixes it. I'm just saying it's a solution that can be looked at.

I don't think foal nominations need to be part of our strategic revenue.

As for the future of host tracks, did you personally support the decision to hold the event at Santa Anita for two consecutive years?

I personally don't remember if I did or not. I do remember the presentations from the management and that when the decision was being made that two things were happening. One was that NYRA was in bankruptcy at that time. We had no idea whether they would come out of the bankruptcy or whether we could engage with NYRA and be certain that we could hold the Breeders' Cup there. Concurrent with that, the negotiations with Churchill were not going well, and Churchill, to the best of my knowledge - I was not personally involved in the discussions - was not being a good business partner financially. So you had two things going on. And the third thing, very important, goes back to what I was saying, that philosophically, Oak Tree and NYRA and Keeneland were 100 percent aligned with what Breeders' Cup wanted to do, their financial [commitment] was much greater, and also, there's a lot of investment that goes into preparations and a lot of investment that was going to go into L.A. and that big media market around Santa Anita. So we didn't know what to do with NYRA because of the bankruptcy; Churchill does not want to deal with us. So do we make a long-term commitment and do we spend the kind of money that we need to and are we prepared to do that? In that context, we thought that if we were going to make that kind of investment, then let's go ahead and make it for two years. There were multiple factors. I don't think there was any political influence in any way, shape, or form. I just think it was circumstance.

Considering the controversy surrounding artificial racetrack surfaces, is Breeders' Cup going to consider racetracks with artificial surfaces in the future?

I don't think it's been discussed, but my personal opinion is that I'm not a fan of synthetic racetracks. I'd rather have three or four major tracks - Woodbine, NYRA, Churchill, Oak Tree - where, candidly, you should have three types of tracks. If I had it my way, that's what I would like to see. You should have a traditional dirt track, you should have a turf track, and you should have a [synthetic track]. If the races get rained out on turf you should go to [the synthetic track]. Otherwise, you run on all three. The infrastructure is there at these tracks to do that.

Are you saying that each facility should have all three racing surfaces?

From the industry point of view, there's a lot of criticism of artificial surfaces, and I think it's deserved. We have almost 80 or 100 years of history on the dirt tracks, and we only have five years of history on the artificial surfaces. People talk about the history, and I can tell you from personal experience that the ligament injuries are way, way, way up on the [artificial surfaces]. So I don't think we have enough empirical data, and I don't think we have the support of what I would call the key customers, which are the [bettors]. They hate handicapping horses on the synthetics and so on, and in hindsight, I think it was a bad decision in California [to mandate synthetic tracks].

Why does the event rotate in the first place? Why doesn't Breeders' Cup just hold the event at the same track every year?

We've discussed that. That may happen in the future, frankly. There has been a lot of debate. The final recommendations were: Should we be a destination event, like golf, or should we be a rotation between the East Coast and West Coast, or should we be a rotation between East, Midwest, and West? That's what it was. Personal opinion again, if we could find a strategic partner where the track is in the right location, it has the right infrastructure, it's accepted by our key customers, the bettors and our fans and so on, and we could have forever a destination event, I'd vote for that. That's what we need. I wouldn't be surprised if that would happen.

We won't be ready to make a final decision on that in the next couple of years. So right now we're going to narrow it down to three or four. But the idea of a destination event is going to stay on the table.