11/21/2003 1:00AM

TVG slowly proving skeptics wrong

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Four rough-and-tumble years ago, Television Games Network launched an ambitious racing channel, promising to redefine the way people watch and wager on the sport. Now, despite an array of skeptics, the company is beginning to deliver on that promise.

TVG has become the country's largest account-wagering service, if rebate shops are not considered. Its chief executive, Mark Wilson, said the company will break even by the middle of next year. And criticism from bettors about the channel's entertainment-oriented programming has diminished as horseplayers - many of whom had grown accustomed to traveling far and wide just to watch a live race - have begun to realize that TVG is filling an immense void.

"If you're just looking to watch racing because you love the sport, it's great," said Jeff Yelke, a Chicago racing fan and handicapper who receives TVG on a small-dish satellite service but cannot bet through the service because of state restrictions. "The main thing is [getting] racing on TV. What did we have before TVG?"

So far this year, TVG has taken in $186 million in bets through its Oregon-based hub. By year's end, company officials are hoping for 30-percent gains over 2002. In addition, for the first nine months of 2003, perhaps another $130 million was bet on TVG tracks through other wagering companies, with the revenues from those wagers going almost entirely to TVG. Last year, handle on U.S. Thoroughbred racing was $15 billion.

TVG's television channel is available anywhere in the U.S. through two leading satellite television services, the Dish Network and DirecTV, and it is also available on cable systems in parts of 11 states, including Kentucky, California, Nevada, and Maryland, reaching 17 million homes.

TVG still has its detractors, and the most vocal are its competitors. Many of the critics remain sore over TVG's controversial practice of signing racetracks to exclusive contracts that prevent competitors from offering TVG's races on their services. One racetrack company, the Maryland Jockey Club, is suing TVG to be released from its contract, but the company filed the lawsuit only after being acquired by Magna Entertainment Corp., which operates its own account-wagering service and television channel. Similarly, TVG has filed a suit against Magna for pulling Lone Star from TVG's network after Magna acquired the track last year.

TVG's strongest supporters also have complaints. Racing officials have said that distribution of the TVG channel has not expanded as fast as anticipated and that TVG's conservative wagering policy - horseplayers in only 12 states can open accounts, according to TVG, compared with 35 or more states for competing providers - has restricted the company's growth.

Lack of Magna tracks a shortcoming

In addition, TVG has not been able to reach an agreement with Magna on that company's racing signals, shutting out TVG's customers from Santa Anita Park and Gulfstream Park, the key tracks of the winter racing season. After a bitter breakdown in talks nearly two years ago, the relationship between Magna and TVG remains strained.

TVG is not close to paying off what it has cost its parent company, Gemstar-TV Guide, which is struggling with its own financial problems. The network has trimmed $5 million from its annual production expenses to $15 million a year, according to one official, and revenue from wagering is approaching that number. But it has lost at least $100 million since being launched, and that money will have to be paid off or written off before TVG can be considered operationally stable.

Despite those concerns, supporters of TVG remain committed to the company. Nick Nicholson, the president of Keeneland, said that he believes TVG has become indispensable, providing unprecedented access to live racing signals.

"TVG is becoming institutionalized, and the racing industry is beginning to learn that you can watch racing," Nicholson said. "It's bettors, it's fans, it's owners, it's trainers. With TVG, we're becoming a real sport."

Bill Nader, a senior vice president of the New York Racing Association, said that TVG has helped stem the tide of racing's decline, although he said he is not sure the network has created many new fans. The network has given existing fans what they expect from other entertainment options: ease and convenience of use, Nader said. If TVG was not around, then horseplayers would be more likely to turn to other sports or betting games, Nader said.

"Every track is wrestling with that issue right now," Nader said. "Everything has become a matter of convenience, and we have to do more as an industry to help our customers. That's really right in TVG's power alley."

Karl Schmitt the president of Churchill Downs, echoed Nader's remarks. "If you intend to put the customer at the center of every transaction, as Churchill does, then TVG is a great part of the mix," Schmitt said. "Customer convenience is a very important part of the business, and TVG is using technology to solve some of those problems."

Turfway gets prime-time exposure

Some of the support for TVG stems from an economic model that gives the racing industry 13.5 percent of each bet through a combination of direct payments for a racetrack's signal and so-called "source-market fees" for tracks and horsemen in the state where the bettor is situated. When TVG launched, the percentage far exceeded anything offered by any other account-wagering company. Since then, most other account-wagering operations have adopted a similar policy.

Bob Elliston, the president of Turfway Park in Kentucky, said that Turfway has received $3 million in payments from TVG since 1999 on total handle of $17 million on Turfway's races. But Elliston said that Turfway is getting more benefit than just the fees: Since Turfway races at night on weekdays, it is sometimes a featured track on TVG broadcasts, exposing a generation of in-home players to the track's signal.

"Not only are we seeing a direct financial impact, but the coverage we are getting as a night signal has a tremendous effect," Elliston said.

TVG got off to a rocky start in the late 1990's when the National Thoroughbred Racing Association agreed to operate its Oregon account-wagering hub. That triggered threats of a mass exodus from NTRA members who believed the agreement would put the NTRA at cross purposes to other account-wagering operators, many of which are owned by tracks. In the end, the NTRA cut TVG loose, and the conflict, while continuing to smolder, lost much of its intensity.

As TVG failed to hit many of its performance goals, its parent company, Gemstar-TV Guide, was running into financial problems of its own. TVG's handle was dramatically limited by the company's strict interpretation of wagering law: TVG would allow betting only in states where phone and Internet wagering were explicitly legal. As a result, TVG found it difficult to convince cable companies to carry the channel if account wagering was not also allowed in an area.

Then came a big break. In 2002, California drafted rules allowing account wagering. It opened up the largest market in the country to TVG and other account-wagering operators. TVG quickly signed an agreement with a Los Angeles cable station and secured three hours of afternoon television time on Fox Sports West.

Beneficial alliance formed

TVG also managed to expand into other states despite its uneasiness about state laws by signing agreements with two other account-wagering companies, Youbet.com and AmericaTab, which both permitted wagering from accountholders in 38 states. The agreements allowed the two companies to offer betting on TVG's tracks, but at a steep price: Nearly all the revenue from the bets would go to TVG. In return, TVG got access to wagering markets it wouldn't touch on its own because of its conservative legal policies.

"They've picked the right spots to partner with other people," Elliston said.

For Youbet.com, the deal made sense as well. Youbet was floundering in part because the service could not offer bets on TVG exclusive tracks such as Saratoga, Churchill Downs, Belmont Park, Hollywood Park, Del Mar, Keeneland, and Arlington. Handle roughly doubled through the service after the agreement was signed, as did wagering accounts, and Youbet is now approaching profitability.

As part of the deal, Youbet granted TVG warrants that would allow TVG to buy a controlling interest in Youbet by May 2004. Wilson, TVG's chief executive, would not comment on whether TVG plans to exercise the warrants other than to say that TVG is "taking the situation pretty seriously." TVG already owns 16.6 percent of Youbet's stock.

Optimism Magna deal can get done

The Magna situation also is far from clear. Wilson said that TVG hopes to reach an agreement with Magna, but he remains cautious. "I think we've spent the last two years out there competing against each other, and I think during that time we've built up a very good television production and account-wagering platform, and I remain hopeful that the powers-that-be will re-engage," Wilson said.

Magna may be ready for a deal. The company has struggled to turn a profit, and Magna officials have blamed some of the company's losses on its investment in XpressBet, an account-wagering platform that has failed to meet revenue targets, and HorseRacing TV, a television station that has limited viewers. Magna recently fired its senior vice president of new media initiatives, Andrew Gaughan.

The company's chief executive officer, Jim McAlpine, said in a recent conference call with financial analysts that Magna was looking to strike agreements with other industry stakeholders in the future, but he did not mention account wagering specifically. McAlpine did not return phone calls requesting comment.

Keeneland's Nicholson said an agreement with Magna is paramount to the long-term success of TVG. "It's really frustrating that during the winter we make it difficult for our fans to follow the best racetracks," Nicholson said. "I wish Magna and TVG could get together. We need to stop fighting among ourselves as an industry."

Should TVG strike an agreement with Magna or consolidate with Youbet, it would face mounting pressures from tracks to broadcast their races live. The channel currently broadcasts eight to 10 races live each hour, but at any one hour during the summer, tracks across the U.S. card more than 40 races.

TVG offers live broadcasts of all the races offered through its account-wagering service through its Internet site, but the video streaming available on the Internet does not come close to the quality of broadcast television.

TVG's programming used to be more of a liability for the company. In its first few years, handicappers ripped the channel for its light-hearted approach to broadcasting, complaining that the network did little to appeal to hard-core racing fans. But the situation has changed over the past two years, after TVG asked its commentators to tone down their delivery and the channel focused more on betting.

"When we first started this, we were under a lot of pressure to get the network going," Wilson said. "I'll be frank: we weren't real good when we started. We deserved a lot of the criticism that we got. But we listened to our customers, and we changed."