01/07/2010 12:00AM

Brick-and-mortar sites face uncertainty

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Simulcast sites in seven states from Virginia to New England have been unable to offer wagering on Gulfstream Park, Santa Anita Park, and Fair Grounds because of a two-month impasse about the rate the sites should pay for the signals, a dispute that highlights a decline in the importance of bricks-and-mortar wagering sites in the age of the Internet.

The sites are in states where account-wagering is legal or, at the least, not explicitly prohibited. Bettors in those states, with the exception of New Jersey, which prohibits its residents from making bets through out-of-state companies, can bet on the three tracks despite the dispute; they're just not doing it at the off-track betting sites and racetracks where they may have wagered before.

That shift has the potential to create some long-term winners and losers. It seems clear the winner in this dispute will be Churchill Downs Inc. and Magna Entertainment Corp., the co-owners of the simulcast-marketing company TrackNet, which is asking the sites - represented by a group called the mid-Atlantic consortium - to pay higher fees for TrackNet signals. Churchill and Magna own account-wagering companies that take online bets in the states in which their signals are unavailable at bricks-and-mortar sites. More important, they are retaining more revenue from the Internet bets than they would from physical locations operated by another company.

By depriving the bricks-and-mortar sites of the signals while making the signals available through their account-wagering platforms, TrackNet and its co-owners have been criticized by some people in the mid-Atlantic consortium for poaching bettors, a practice that 10 years ago had a stigma in the racing industry. That stigma, though, has lost much of its meaning in the account-wagering era, when racetracks and account-wagering companies began competing for bettors regardless of geographical areas.

In addition, racetracks in the affected states are unable to offer betting on the TrackNet signals on their local account-wagering operations, putting them at a competitive disadvantage to other account-wagering platforms that carry the signals. Account-wagering operations being affected include those owned by Philadelphia Park, Penn National Gaming Inc., the New Jersey Sports and Exposition Authority, and Colonial Downs. All of those sites have probably lost some customers to the "Big Four" - Churchill's twinspires.com, Magna's XpressBet, TVG, and Youbet.com - because of the popularity of Gulfstream, Santa Anita, and Fair Grounds, the core of the winter racing menu in the U.S.

Scott Daruty, the president of TrackNet, acknowledged this week that the availability of signals on multiple account-wagering platforms in the affected states was having an effect on the negotiations, though he played down the concerns of critics who contend TrackNet has few incentives to deal with bricks-and-mortar sites. Daruty also pointed out the signals are available on platforms operated by TVG, a competitor of twinspires.com and XpressBet, and Youbet.com, the account-wagering company Churchill is in the midst of buying.

"The people who say we're just doing this to help twinspires and XpressBet, they're wrong," Daruty said. "That's not why we're doing it. The price that the mid-Atlantic is willing to pay is just too low compared to what other sites are paying. Even with account-wagering, and even with our product being available on all the platforms - even with all that - we still want a presence in the racetracks and off-track betting parlors because we recognize that some fans prefer to bet at a facility. We don't want to dictate to a racing fan how to bet on our product."

For the last five years, account-wagering has been the only bright spot in a moribund industry - and it ought to be, considering horse racing has the only legal exemption on internet betting in the U.S. Still, through the first nine months of 2009, betting through the four most prominent account-wagering companies has been $1.2 billion, or an annualized total of approximately $1.5 billion (wagering drops off in the last quarter of the year), about 12 percent of the 2009 handle of $12.3 billion. Offshore account wagering is believed to total another $1 billion, with much of that coming from technologically sophisticated computerized robotic wagering programs.

In other words, the account-wagering totals are still dwarfed by the handle figures at bricks-and-mortar sites. But whereas handle at physical locations is going down, account-wagering handle continues to go up, even during the recession-induced contraction, which has led to an 16 percent decline overall in racing handle in the last two years.

The point is best illustrated by the handle figures from the opening-day card at Gulfstream: All-sources wagering was down 37 percent, in part because of one cancelled race and the ongoing recession, but mostly because bettors on the Eastern seaboard are accustomed to playing Florida races. Obviously, those bettors have not gone to account-wagering sites en masse.

Martin Lieberman, the executive director of the cooperative representing the sites, said customers at the affected sites typically account for approximately 10 to 12 percent of the total handle on the signals from Gulfstream and Santa Anita. But he said handle at the cooperative's sites has held up despite the dispute, because bettors have shifted their wagering to other signals. The opinion appears to be validated by the results in December at Turfway Park, where all-sources handle remained steady despite a 17.7 percent drop in on-track wagering. Some money from the mid-Atlantic shifted from New Orleans and California to Kentucky.

But that resilience at the bricks-and-mortar sites still does not impress most of the decision makers at the top of the industry, who are loathe to ignore the growth rates of account-wagering, the ubiquity of sophisticated mobile devices, and the graying demographics of horseracing's primary customers. Combine those developments with the comparatively low costs of account-wagering operations and the ability of companies such as Churchill and Magna to cut out middlemen by operating their own OTBs in cyberspace, and it's apparent that investment in bricks-and-mortar sites is likely to decline significantly over the next decade (barring the legalization of OTBs in a state like Texas).

It's already happening. New York City Off-Track Betting Corporation filed for bankruptcy in December, and as part of its reorganization, the company plans to close the majority of its 60-plus storefronts in the city's five boroughs. What will remain, according to Sandy Frucher, the OTB's chairman, will be parlors that offer bettors more amenities than the bare-bones storefronts that used to make up the majority of the company's off-track betting network. To compensate for those bricks-and-mortar losses, New York City OTB is going to push its customers to its account-wagering operation, Frucher said.

The closing of off-track betting parlors, in New York and other areas, will probably lead to frustrations among many bettors accustomed to the social aspects of horse-race wagering. But that may also be indicative of the changing times. When operators of account-wagering platforms talk about the future, they often discuss the social-network applications they are adding, such as chat rooms. Like it or not, horse racing's future is increasingly in the home, and sometimes, it's still wearing its pajamas.