05/26/2005 11:00PM

Racing tangled in global mess

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NEW YORK - In what has become an annual ritual, Sen. John Kyl of Arizona is again trying to introduce a bill to restrict betting over the Internet. When a first draft of the 2005 version surfaced earlier this week, there was an alarming difference from his previous attempts: This time, there was no exemption for horse racing. The draft bill would not only prevent racing's lone growth segment from expanding, but also would shut down all current account wagering and, if applied literally, make most simulcasting illegal.

The racing industry and financial investors understandably reacted with panic. Shares in Youbet.com were down nearly 13.4 percent to close at $4.84 on Tuesday, and its chief executive, Chuck Champion, said the bill would "destroy" his company. Churchill Downs shares also fell 2.1 percent.

The good news is that the bill is in very early stages, open to plenty of change, and still a longshot to pass in any form. Kyl's crusade has been losing rather than gaining steam each year as public enthusiasm for governmental intervention is on the wane and few of the moralists' dire predictions about the evils of online gambling have come true.

The bad news is that the lack of an exemption for racing in this year's version reflects an increasingly messy situation involving the World Trade Organization that should never have happened in the first place and is going to be problematic to resolve.

The Geneva-based WTO, founded in 1995 as the successor to the General Agreement on Tariffs and Trade that began after the Second World War, has 148 member nations that account for 97 percent of the world's trade. Nations have the option of joining for some but not all products or service areas. The United States made a simple administrative error of omission by agreeing to join rather than opt out of the gaming sector.

It compounded that error a few years ago by undertaking ill-advised prosecutions of some offshore gaming operations that were attracting American customers. These were perfectly legal businesses in their host countries, and the tiny island nation of Antigua fought back, winning a stunning victory as the WTO decided that the U.S. had overreached. The Justice Department appealed the decision, and earlier this year the WTO issued a complex partial reversal that found fault with the Interstate Horseracing Act, which enables U.S. simulcasting and account wagering.

Horse racing had never been the issue, but now that the WTO was scrutinizing American wagering statutes, it said that the Interstate Horseracing Act needed to be amended because racing could not be exempted from free-trade laws. This is why there is no exemption for racing in the current Kyl bill draft. So now racing could be jeopardized because of the Unites States' accidental initial failure to take gaming out of its WTO participation, and its overreaching meddling with legal gaming operations in other countries.

From all indications, the racing industry is handling the situation well. Whatever else you may think of the National Thoroughbred Racing Association, it has been an unqualified success in consolidating the industry's considerable combined clout in Washington, to the extent that even supporters of the Kyl bill say they will probably need racing's blessing to move the bill along.

The mistake that racing is making is in trying to have it both ways and considering blessing any version of the Kyl bill. Some track operators continue unreasonably to blame a phantom menace of offshore bookmakers for their business woes and want some kind of government intervention, despite seeing year after year that any attempt to carry out the fool's errand of regulating the Internet is likely to backfire and jeopardize existing business and future growth.

The Internet is not some organization that can be bargained with or subjected to rules. You can sooner negotiate a settlement with the wind. Instead of trying to support any version of the Kyl bill, racing should be exploiting technology to offer superior proprietary services such as an integrated nationwide account-wagering system that would allow people to play all tracks and receive multiple video and information feeds. It shouldn't be 10 times more difficult to bet on horse races online than it is to buy a shirt or join a poker game, but currently it is.

The federal government could benefit from a similar strategy. Instead of continuing to get itself into trouble by interfering with foreign gambling concerns, it should acknowledge that online betting is no different from online banking or shopping, and allow American companies to operate regulated, licensed wagering businesses. Just as states realized that it was better to offer lotteries than cede the market to illegal numbers games, government should start reaping the benefits of activities that aren't going away.