07/01/2007 11:00PM

Fight over Internet betting gets bloody

Email

WASHINGTON - During the week of the Kentucky Derby, America's horseplayers learned suddenly that their industry was in the midst of a civil war. When they turned on TVG, the horse racing network that is available in

27 million U.S. homes, the network's familiar coverage of pre-Derby activities was absent, and Churchill Downs's races were gone, too. If horseplayers tried to bet the Derby at YouBet.com, the most prominent Internet wagering platform, a message on the computer screen informed them that contractual issues had forced YouBet to drop Churchill's races.

Bettors can play Churchill at other online sites, such as XpressBet and AmericaTab, but these don't take bets on many major tracks. Their customers were not allowed to wager on the Belmont Stakes. The Thoroughbred wagering business has fractured, leaving horseplayers bewildered and furious that they cannot place all of their bets at a single outlet.

What's going on? Horseplayers have been caught in the crossfire of a battle over the economics of wagering in the age of the Internet. Two key issues are involved. One is simple: the price that racetracks charge for their product. The other is complex: the special status of TVG within the sport. From every dollar wagered on a U.S. horse race, the industry takes roughly

20 percent; in other words, there are 20 percentage points to carve up among all the parties in a betting transaction. When simulcasting began, tracks charged a low price for their TV signal. The receiving track would typically pay a 3 or

4 percent fee and keep the balance of the 20 percent. Companies that offered phone or Internet betting paid similarly low rates, but now the operators of most major tracks believe that the sport's pricing structure is out of whack. A track such as Belmont Park or Santa Anita incurs huge expenses in putting on a top-classic product, but an Internet betting operation with minimal overhead can pocket most of the

profits.

So why don't tracks simply raise their rates? The existence of TVG complicates the issue.

TVG was created a decade ago with an intricate business model. If a customer at Boston's Suffolk Downs bets on a race at Belmont, that's a straightforward transaction for which Suffolk might pay 3 or 4 percent. But what if a resident of Boston stays at home to watch TVG and bets the Belmont race by phone or computer? TVG developed the concept of a "source market fee" - money that would be paid to the track or tracks in the area where the bet originated. When the Boston horseplayer stayed at home to wager, the proceeds might be distributed with 3.5 percent going to Belmont, 5.5 percent to TVG and the biggest share to Suffolk.

This was a generous deal for TVG's partner tracks, but it came with a kicker. Tracks that signed up with TVG had to give it exclusive rights to take bets from home. If the Boston horseplayer watched TVG but bet the race with a separate wagering service, TVG wouldn't make any money and the whole economic model would collapse. With complete control, TVG then licensed the right to take wagers on its tracks to other companies, such as YouBet.com. This power made TVG the

1,000-pound gorilla in the wagering business.

That was the status quo until this spring. Churchill Downs's 10-year deal with TVG was expiring. Churchill Downs - which also owns Arlington Park, Calder and other tracks - had a new management team with some new ideas.

"Ten years ago," Churchill executive vice president Bill Carstanjen said, "nobody knew where this experiment would take us. Ten years later we know that account wagering is incredibly important to us as a track. It makes sense to negotiate with the providers and reset the pricing."

In other words, if a horseplayer in Boston was betting a Churchill Downs race through his computer, Churchill didn't want that transaction to be governed by TVG. Churchill wanted to set its own prices. The biggest owner of U.S. racetracks, Magna Entertainment - whose holdings include Gulfstream Park, Santa Anita and Pimlico - shared the same view. And an upheaval within the industry occurred with dizzying speed.

Churchill and Magna - once corporate arch-enemies - formed a joint venture called TrackNet Media to sell their racing signals as a package. Churchill bought a half-interest in Magna's television channel, HorseRacing TV. Magna already had its own telephone and online wagering business, XpressBet, so Churchill started its own. Churchill also bought AmericaTab and two affiliated betting sites as part of an $80 million deal.

Churchill and Magna laid down the law: Betting services had to choose between offering TVG-related tracks or the TrackNet products. It was like a nasty divorce in which the splitting spouses expected their friends to choose one side or another.

Neither side has budged. "TVG has been incredibly difficult to deal with," said Joe De Francis, the executive vice president of Magna. TVG general manager David Nathanson said the network is faring well, even without Churchill: "We have a different program lineup but it's the strongest we've ever had. We're driving handle to our exclusive-track partners."

He insisted the TVG business model still is a sound one that provides great benefits to the industry.

Both sides in this dispute have some valid arguments, and they should show some respect for the other's position. A decade ago, the idea of a national horse racing channel was a pipe dream, and no racetrack was willing to try to create one. TVG undertook the difficult and expensive task. It defied all expectations by putting its signal on DirecTV and many local cable systems, as well as many outlets in Europe. (HorseRacing TV has but a fraction of this exposure.) The industry should feel indebted to TVG, instead of trying to emasculate it.

But TVG needs to recognize that its cherished business model is an anachronism. As Internet wagering has become commonplace, many horseplayers rarely set foot in a racetrack. Paying a juicy fee to Suffolk Downs when a Bostonian places a bet no longer makes any sense. It's like compensating a Giant supermarket when somebody in the neighborhood orders dinner from LobsterDirect.com. When the industry divides the 20 percent from wagering dollars, the tracks putting on the show do deserve a larger slice - just as Churchill has been arguing.

Regardless of how the parties resolve their differences, they had better find a way to settle it quickly. Churchill, Magna, and TVG are pursuing a course of action all too familiar in the racing industry: forgetting about their bettors as they look after their own interests. This time, the industry has angered and alienated many of its dwindling number of customers, who want to make their own free choices about what they can bet and where they can bet.

(c) 2007, The Washington Post