11/03/2006 12:00AM

Maintaining status quo isn't good enough

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Robert Evans was in a good mood. It was the Thursday before Breeders' Cup, and he was conducting a day-long series of interviews from the director's room at Churchill Downs.

It should not be unusual for a chief executive to smile and joke. But Evans is the chief executive of Churchill Downs, where for 22 years that job was held by Tom Meeker, an ex-Marine who was one of the most respected executives in the racing industry but notoriously prickly.

Evans, 53, is a native of Cincinnati who owns a horse farm in Versailles, Ky., and has a master's degree in quantitative economics. He came to Churchill last August from manufacturing and private-equity companies, winning over the Churchill board with his belief that the racing industry can grow if it innovates and takes advantage of technology to better serve the betting public.

During a 45-minute interview with Daily Racing Form reporter Matt Hegarty, Evans said that racing will grow if it can "embrace change while preserving the past." When asked if Churchill Downs would install an artificial surface, Evans wondered aloud if the racing industry truly knows the impact of artificial surfaces on the game.

"My guess is that we will find out some things we haven't even thought of yet," he said.

He made it clear that he believes change happens in unpredictable ways and that his goal is for Churchill to capitalize on the changes that he believes are best for the game.

Daily Racing Form: You've come into this job filling some big shoes. Do you feel any pressure because of Tom Meeker's reputation?

I don't feel any pressure because of that. There's two sources of pressure. One is this whole Kentucky Derby thing that happens here, that's happened here 130-plus years, and hopefully when I leave here it will have happened for 140-plus years or something similar. I certainly don't want to be the guy that takes that in a negative direction. There's not too many brands in the United States that have that kind of longevity, so that to me is something to think about and worry about.

The second thing is there's a business here, Thoroughbred racing, that needs to find a different path to the future, because the current path is not a good path. Look at any top-line measure of the industry, and it shows that the industry is stagnant, and has been for a decade.

I'm the world's worst caretaker. So I'm not here to sit in my office and leave it as I found it. I'm here to try to grow the industry and grow Churchill Downs to make racing more exciting to the people of the U.S. and all over the world. That's a lot of pressure, because it's not easy to do those things.

In the past 18 months, Churchill has strengthened its balance sheet with the sale of Hollywood Park and also with the sale of Ellis Park. What now are going to be Churchill's priorities, both over the short term, say the next 12 months, and the long term, the next five years?

Growth.

How is Churchill going to grow?

In the near term, over the next year or so, we're going to do that out of the existing business. We're going to grow the racing business. We certainly have the opportunity to grow a slots business down in New Orleans [at Fair Grounds], and we'll grow the revenues and profits down there, but also what we have to do is find ways to grow the racing business. Beyond that, I don't think there are any limits on what we might do, but I don't think we have any clear plans to go down any new path. My guess is that over the next 12 months or so we will probably find something to do outside of the traditional business that will offer us some significant opportunities.

Are you a bettor? Do you think you understand the needs of the horseplaying public?

I understand the needs of bad bettors, because I'm a bad bettor. I'm a lousy handicapper. I'm the last guy someone should ask for a tip.

I'm talking about the people who spend their discretionary income betting on horse racing. Do you understand their needs?

I think to some degree. There are two sets of needs. There are the things that the consumer knows they want, and then there are the things that the consumer doesn't know they want because they haven't been exposed to them before. The classic story here is the Chrysler minivan. The president at the time said that "no one sent us a letter at the time asking us to build minivans." So I think part of our future is to do the things that consumers know they want, but at the same time we have to find new things they want that they haven't even thought of yet.

If we spend all of our time taking care of the customers that we've already got, we'll do okay, but I'll bet there's very little growth. What we have to do is go serve unidentified consumers that don't go to racing today. We have to figure out what brings them to the table. That's where the growth is. If you ask me which one do you think I'm better at, understanding the existing horseplayers' needs, or understanding the potential fan base we can bring to racing, I'll probably say the latter. Fortunately, I have a whole organization that understands the former, and I'm smart enough to listen to them.

In the area of account wagering, every racing fan who has an account would agree that they want one account in which they could bet any race anywhere at anytime . . .

It works for me.

Then why doesn't that exist? Why are there so many different middlemen and so many protective walls?

All the existing players, the tracks and the [account-wagering] platforms, they all have agreements that have a start date and an end date, and some of them are pretty long agreements. While those agreements are in effect, we have to honor the agreements. I'll tell you this, we will do all that we can do to try to meet customer demand, which is to give fans the ability to have one account, to wager on any race, anywhere, at anytime. If anybody can tell me how that doesn't serve the customer well, throw the argument out there. But it seems to me if that's what the customer wants, that's what we should give them.

So what will Churchill do when its long-term agreements with Television Games Network expire?

We've done some thinking about it, but the appropriate time to deal with that is when those contracts expire. [The agreements for Churchill's tracks expire throughout 2007.]

Is Churchill going to continue its policy of seeking slot machines at its tracks?

Yes. There's two reasons to do it. This is sort of a Kentucky reason, but horse racing, or Thoroughbred racing, is the state of Kentucky. And if you look at Standardbred racing, this used to be the nexus of that world, and it isn't anymore. We have to protect that. And the next reason, is that we're in competition for the consumer's wagering dollar, and they've got a million different places to spend it. All I want is a level playing field, so that if someone over here or over there or down the street, if they can offer a certain set of games to the consumer, then we should be able to offer them too, and let the best executioner win. This dividing up the playing field based on legislative progress or lack thereof is kind of a crazy game. It's like saying, in this state, you can only sell cars with three wheels.

But what is being contemplated in Kentucky is limiting casino sites to racetracks. If we're talking about a level playing field, then why should racetracks be the only casino operators to the exclusion of any other business?

Society decides what it wants to have through the legislative process. Gaming is one of those things. All I'm proposing is that the people who are providers get the chance to do it. As far as I'm concerned, if somebody wants to legislate alternative gambling on every street corner, that's okay as long as everybody has a chance.

One of the interesting consequences of casino gambling at racetracks over the last 10 years - at least by and large - is that rarely are racing fans ever the beneficiaries of the revenues. They all flow to the companies and horsemen. Why is it that we haven't seen these revenues make the racing experience better for fans, either in the form of lower takeouts or better facilities?

I don't know for sure. We're in an industry that is economically unprofitable, and in that world, there's not a lot of dollar-and-sense room to do what you want with the funds that are available. This industry will probably go through a significant period of consolidation. Once it's rationalized itself economically, then I think you'll see the distribution of the value created in the business accrue differently. But right now, when you're struggling to just break even, there's not a lot of wiggle room on where you might put those revenues.

When you talk about consolidation, are you talking about a future where there are far fewer racetracks or far fewer companies?

My guess is that we'll end up with fewer tracks and with fewer entities that manage those tracks. It's not like this is a new concept. Every industry I can think of goes through the same cycle. It's sort of econ 101.

Is Churchill still in an acquisition mode?

Not in the sense that we've got a program. Opportunistically, if something comes along, we'll take a look at it, but we don't have a goal or a program to achieve a goal that we want to buy a few more tracks.

Going back to a subject we glanced over, what's your opinion of the elasticity of takeout? Is a lower takeout better for the game over the long term? [Elasticity is a measure of how demand for a product changes in relation to a change in price.]

I don't know. I'm an economist by education so I'm willing to test that. That would be some good information to have. It wouldn't surprise me if you could drive higher handle levels off lower takeouts, but I think there's so many variables in that equation that you'd have to control for that it would be hard to prove.

This is the problem: In an industry that is struggling economically, people don't take a lot of chances. This would be a chance, to change that part of business. Who knows? Maybe we'll get a chance to do it. Conceptually, I'd like to find out.

You're going to have plenty of money from the slots operation at Fair Grounds. Why not drop the takeout to 6 or 7 percent there for a year?

Maybe that's a good place to do it. But if you ever wanted to think about an area you have a lot of variables to control for, Louisiana is it, post-Katrina. The whole area has been devastated, so how do you know what's real, and how do you know what's the rebirth of the area? It would be a tough experiment to design.

You'd be competing in the simulcast market, and so if Fair Grounds is up there on the television screen with a lot of other tracks and has a 5 or 6 percent takeout, you wouldn't have the Katrina variables. It's a national market.

It's a good idea. I'll think about it.

In the international market, every time you go to a racing conference someone hangs up a slide saying that there's so-many billions of dollars out there....

Ninety-five billion.

How much of that is realistic?

I don't know if this applies to horse racing or not, but I've been in several other businesses in the past where we've tried to expand internationally. In every single case, it's tougher than you think. The changes you have to make, not only to your product, but to some of your business practices, is usually pretty substantial. So my guess is, a six-furlong sprint on dirt running counterclockwise, that's not going to immediately find a market everywhere. If you take the American automobile out to the international market, there's a lot of places where people just say, "That's not what we do here. That's not interesting." As you know, we're involved with Magna in this Racing World partnership, so we'll see how that goes. It's incumbent upon us to try, but I don't think the degree of change is fully understood yet.

On that topic, last week TVG announced a partnership with Racing World's competitor in the U.K., and they are presumably going to beam Churchill's races into homes there, right alongside Racing World. How is Churchill going to respond to that?

Looking at it, we have not given TVG the rights to assign our video or wagering signals to anyone in the U.K. That did surprise us. We've been a little distracted this week - there's this thing called Breeders' Cup going on - but we will get back to it.

One of the bigger topics of debate in the racing industry now is the argument that racetracks made a mistake 20 years ago by selling their signals for 3 percent in the simulcast market. I don't necessarily believe that was a mistake, but the pressure is there to move those prices up. Where do you see simulcast rates going? Are racetracks going to try to extract more revenue from that side of the business?

It's hard to say. The only thing I've observed so far is that no one is happy about it. Or maybe damn few people are happy, and I haven't met them yet. But no one is happy about the current economic structure for simulcasting and [account] wagering. ... Most people think this is something that is going to have to change. How it changes, and when, it beats the heck out of me. Usually economic forces are like water, they find equilibrium. So I imagine this will get sorted out at some point. It probably won't be one big fell swoop. It will probably move in bits and pieces and fits and starts.

You mentioned earlier two decades of no growth in the industry. The only growth has been on the slots side. Do you confidently believe there's a way to grow the revenues purely from the racing side?

Why not? Nascar did it. Poker did it. Blackjack did it. Games that didn't even exist have found new audiences. In the end, it's up to us to be creative enough and clever enough and courageous enough to find this stuff that works. . . . If you don't believe that, get the heck out of the leadership jobs. If you think that the world is all about preserving the status quo, then find something other to do than this business, because there's nothing there for anybody.