08/19/2005 12:00AM

Once optional, slots becoming mandatory

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Last week, officials at Rockingham Park in New Hampshire pledged to return Thoroughbred racing to their track as long as the state legalizes slot machines. They said that slot machines would allow the track not only to race Thoroughbreds again, but to do so in a manner that would compete with venerable Saratoga Race Course in upstate New York.

Of course, without slot machines, Rockingham would remain what it is today: a small track that runs a relatively inexpensive harness meet to preserve the right to offer simulcast races year-round while hoping eventually to land slots. And that's because holding Thoroughbred races at the track is not profitable in the long run.

Rockingham's gambit has become an increasingly common strategy. Across the country, racetracks are finding that the business of holding Thoroughbred races does not make economic sense without subsidies from slot machines, and for perhaps the first time since racetracks began lobbying for slots a decade ago, statistics bear out that conclusion. In fact, it has become increasingly clear over the past 18 months that racing has reached a crossroads, and not just in the sport's hinterlands.

* Hollywood Park on the prestigious Southern California circuit has been sold by Churchill Downs Inc. because the current real-estate boom has made the property too valuable to justify running horses.

* Magna Entertainment Corp., the country's largest racetrack operator, has lost $245 million over the past 3 1/2 years and is shopping its poorest performing tracks, although Magna officials have said that Santa Anita and Gulfstream Park will not be sold.

* The New York Racing Association, which will start benefiting from slots at Aqueduct next year, has lost $30 million over the past two years and is expected to lose $10 million this year. NYRA racked up the losses even though its tracks - Aqueduct, Belmont Park, and Saratoga - attract the most wagers per day of any year-round racing association in the country.

Thoroughbred racing increasingly cannot pay its own way, even as the industry is struggling to address a variety of problems: an antiquated bet-processing network that has been targeted for improvements without any significant progress; rapidly escalating expenses associated with insurance for stable workers and jockeys; decaying facilities in need of capital improvements; and what appears to be a failure by the racing industry to expand the sport to new players or make the game more attractive to existing bettors.

"Right now, you have this formidable competition from poker and casinos and a very costly game to play in racing," said Robert Lawrence, an economist at the University of Louisville who is the director of the school's Equine Industry Program. "There's no gambling machine that costs more than a racehorse."

Handle on Thoroughbred races dipped 0.4 percent last year, the first annual decline since 1993, and has dropped 5 percent in the first six months of this year despite rapid growth in account-wagering, which offers bettors more convenient - and, in some cases, far less costly - ways to wager. Although purses were up 3.5 percent in 2004 compared with 2003, if slot-machine subsidies were stripped out of the calculation, purses derived strictly from wagering would actually be going down.

What's more, the decline in handle is complicated by another significant development: As more handle moves to account-wagering operations and rebate shops - a $2.7 billion segment of the market last year - racetracks get less back for each dollar wagered. That translates into less money for capital improvements, research and technology, and customer-service programs. The double-squeeze is putting more pressure on racetracks to consider whether it makes sense to keep racing, given the alternative uses for the vast tracts of land occupied by a typical racetrack.

"The industry may not embrace this from an emotional standpoint, but if you study results objectively, the future of tracks depends on adding alternative gaming to the mix," said Tim Smith, the former chief executive of the National Thoroughbred Racing Association who is now the president of Friends of New York Racing, an advocacy group in New York that has suggested slots should be legal at Belmont Park as well as Aqueduct.

The industry's reliance on slot machines could become a source of concern because the ability of tracks to operate slot machines is in the hands of state legislatures, which can tighten or open the purse strings based on state budgetary needs or the complaints of potential competitors for expanded gambling.

In 2003, the latest year for which figures are available, slot-machine players and casino gamblers provided $148.9 million in subsidies to the racing industry, or 14 percent of the total purse distribution of $1.06 billion, according to the Thoroughbred Racing Associations. Racing officials estimate that the 2004 figure will likely be $200 million, given higher revenues at tracks in New Mexico and Louisiana and slots at Finger Lakes in New York. Total purse distribution was $1.09 billion in 2004, according to The Jockey Club.

Slot machines are legal at racetracks in eight states: Delaware, Florida, Iowa, Louisiana, New Mexico, New York, Pennsylvania, and West Virginia, although slots have yet to come on line in Florida, Pennsylvania, and at several sites in New York, including Aqueduct. Serious efforts to get slots at Thoroughbred tracks continue in just about every other major racing state, including Texas, Kentucky, Illinois, California, Maryland, and Ohio.

Even if no new legislation is passed, the racing industry's dependence on the subsidies will increase over the next two years, perhaps exceeding $400 million annually - compared with the $900 million that parimutuel wagering currently provides for purses each year. The Aqueduct casino, which is slated to open in the fall of 2006, is expected to pump $80 million annually into purses in New York; racetrack casinos and subsidies from stand-alone casinos in Pennsylvania are expected to add at least $100 million in subsidies; and Gulfstream Park will likely add tens of millions of dollars more.

Without the subsidies, purses would be declining. According to figures from the Thoroughbred Racing Associations, purses derived from handle fell in both 2002 and 2003, by $13.8 million in 2002 and by $25.8 million in 2003. Even with the slot machine subsidies, purses declined overall in 2003 by 2 percent.

The only serious growth segment of the market is account wagering, but nearly all the handle in that segment appears to be coming from existing players, given that overall handle is not increasing. Last year, according to estimates from the NTRA, wagering through domestic account-wagering operations and rebate shops located domestically, offshore, or on Native American reservations was $2.7 billion, up from approximately $2 billion in 2003. Approximately $1.5 billion was from rebate shops, according to the NTRA, with the remainder handled by domestic account-wagering companies such as Television Games Network, Youbet.com, XpressBet, and AmericaTab.

Given the growth in this area and considering that account-wagering operations allow bettors to play from more convenient locations and that rebate shops give their customers cash-back incentives - usually at least 10 percent of handle - shouldn't handle be going up?

That's hard to say, said Greg Avioli, the deputy commissioner of the NTRA, which released a report last year calling attention to the revenue declines. But, he added, "I can say that we are seeing a clear trend for our business to be moving to Internet wagering, and it's clear that we also need to be moving our high-end customers to rebaters. Nothing I have seen indicates that that will slow down or reverse itself."

Few racing officials have offered specific strategies to reverse the declines. Avioli said that racing should embrace the Internet and seek to make wagering as convenient for its players as possible, and he urged racetracks to seek approvals from racing commissions to offer rebates to compete with offtrack locations that currently offer the awards. However, Avioli acknowledged that in the "absurd extreme" - if all wagering dollars migrated to rebate shops - betting would have to be $75 billion annually, or five times the current level, to maintain racing's current revenue streams.

Charlie Hayward, the chief executive officer of NYRA, acknowledged in an interview on Friday that traditional revenue streams for racing would make it difficult for NYRA to turn a profit in its current structure, but he said that NYRA is hoping to increase revenues from wagering by taking back customers who have moved to rebate shops and account-wagering companies. NYRA will do that, Hayward said, by offering its own rebates.

Under the rebate program, which was submitted for approval to the New York State Racing and Wagering Board earlier this year, bettors who wager $2,000 a month through the NYRA One telephone-betting program would be eligible for a 1 percent rebate. High rollers who bet at least $500,000 a month, or $6 million a year, would be eligible for a 3 percent rebate on win, place, and show wagers; a 4 percent rebate on two-horse bets; and a 7 percent rebate on superexotic bets, Hayward said.

"We could get some incremental handle gains through the churn on the rebates, and we can create some incentives for owners and trainers and people who have an interest in the economic health of the industry to sign up," Hayward said. "We definitely think we can get some revenue gains by cannibalizing what's already going on out there."

Smith said that racing's problems will be self-correcting, but only after all surviving racetracks have slot machines or agreements for subsidies from gambling in their states. Smith cited results in Canada, where racetracks have a partnership with the government to promote racing using revenues from slot machines, or video lottery terminals, at the tracks.

"So as long as there are strong protections for racing built into the VLT legislation in each state so that some of the VLT revenue can go back into facilities improvements and technology improvements as well as purse subsidies, history seems to show that VLTs just don't create revenue for the state and operators, but rather where they have come on line they help the racing industry as well, purses and otherwise," Smith said. "Without any exception in recent times, the addition of VLTs at racetracks has benefited all major stakeholders, the racing industry as well as government."

On some racing circuits, racing is receiving subsidies from casino gambling even though the tracks do not have expanded gambling on the premises. In New Jersey, Atlantic City casinos began providing an $86 million, four-year subsidy to the state racing industry beginning in 2004; in Indiana, a tax on casino admissions that typically totals $5 million a year goes to Indiana Downs and Hoosier Park, owned by Churchill Downs Inc.; and in Washington, Emerald Downs received $1.8 million this year from the Muckleshoot Indian tribe, which owns a casino near Emerald and recently purchased the land under the track.

According to Susie Sourwine, the vice president of marketing for Emerald, the $1.8 million subsidy has allowed the track to turn its business around this year after nine straight years of losing money. The subsidy was directed into the purse account, and handle has gone up at the track as a result.

"We've had a very good year," Sourwine said. "And we believe that purses are the stimulus factor. If you have better purses, you have better handle, and vice versa. It can be a horrible spiral, or a good spiral."

On some racing circuits, however, the spiral has begun going down, and horsemen, especially, are beginning to get nervous.

In Ohio, for example, the membership of the Ohio Horsemen's Benevolent and Protective Association refused recently to give permission for Ohio tracks to send their signals to several account-wagering companies - including one owned by two Ohio tracks, River Downs and Beulah Park - without major concessions on revenues, contending that the state's horsemen were not getting their fair share.

Gus George, the president of the Ohio HBPA, said that he urged his members to accept the terms of the horsemen's previous agreement, but many other members of the board balked, in part because they did not see any solution to the problem of declining revenues, George said.

"Little by little, even though the tracks are making a lot of money in the ADWs, the industry is dying," George said, using the acronym for advance deposit wagering. "Eventually there's going to be very few of these racetracks that are going to be able to run unless they have slot machines."

Jack Hanessian, the general manager of River Downs in Cincinnati, the part-owner of a collection of account-wagering companies incorporated under the name AmericaTab, acknowledged that account-wagering was a profitable business for River Downs and other racetracks and that without it, River Downs would shut its doors.

"This is not a healthy industry," Hanessian said. "What we make at AmericaTab we use to support the racetrack. We're not flying to the Caribbean every weekend. Live racing is not carrying itself, and that's true anywhere in the country, with the exception of Keeneland and Del Mar. If we didn't have Internet wagering, we would be closed. It's not like slots are going to be legal in Ohio anytime soon."

Purse money totals

Total Purses

YearTotal (millions)
1996$792.7
1997851.5
1998904.0
1999962.9
20001,030.9
20011,067.5
20021,074.2
20031,055.5
20041,092.1

SOURCE: Thoroughbred Racing Association

U.S. Handle

YearTotal (billions)
1996$12.269
199713.327
199813.805
199913.724
200014.321
200114.599
200215.062
200315.180
200415.099

SOURCE: Jockey Club

Slots and racetracks

States with slots

Delaware
Florida
Iowa
Louisiana
New Mexico
New York
Pennsylvania
West Virginia

Slots approved but not yet in operation

Florida
Pennsylvania
Several sites in New York

Major circuits seeking slots

California
Illinois
Kentucky
Maryland
Texas