By Steve Zorn
Well, it took a while, but there are more and more signs that
horse racing isn't being spared the ills that are affecting the rest of the
economy.
There
are three ways of measuring how well racing is doing, depending on what your
economic interest is. If you're
a commercial breeder, what you care most about is the average, the median, and
the buy-back rate at the sales. If
you own a racing stable, you care about purses, which are funded by handle and
by slot machines. And if you're a race track operator or the owner of an ADW or
OTB operation, you care about handle, because that's where your revenue comes
from.
Now,
for the first time that I can remember, all those indicators are heading down
at the same time. Sales prices are down, and buybacks are up. According to a recent NTRA/Equibase report, nationwide
all-sources handle was down almost 10% in the third quarter, compared to the
same period last year, and down 5.75% for the first nine months of the year.
And purses, which had until now resisted the downward trend, were down 1.29% in
the third quarter, compared to 2007, and 0.04% for the year as a whole. Admittedly, that's not much, but the
decline is accelerating, at the same time that costs for horse owners keep
rising; the median day rate for a horse in training in New York is creeping up toward $100 a day, and
more and more trainers are being forced to charge separately for tack and
supplies, for their workers comp. coverage, for paying the extra groom on race
day, and so on.
Let's
look at these trends in a little more detail.
Auction Sales
At
the Keeneland September sale, which offers more yearlings than all other US
sales put together, only 3605 (65%) of the 5555 horses catalogued actually
sold, even though the catalogue was bigger this year than last, when 3799 sold.
The rest either failed to meet their reserve or were withdrawn by the
consignors -- some for
injury, but many because the market was weak. Gross revenue declined by 15%, from
$385 million to $328 million, average price declined from $101,000 to $91,000,
and the median price (half the prices were higher, half lower) dropped from
$43,000 to $37,000.
Results
at the Ocala Breeders Sales Co.'s August yearling sale, and at Fasig-Tipton's
Midlantic sale in Timonium at the end of September were similar. At Ocala,
only 56% of the yearlings in the catalogue were sold, compared to 62% a year
ago, and average price dropped by about 15% at both the select and open
sessions. At Timonium, the
number of horses sold dropped by 16% compared to 2007, to 483, just barely over
50% of the number catalogued; median price dropped from $10,000 to a paltry
$9,000, and average price dropped by a huge 27%, to $17,000. And the weak market shows signs of
continuing into the fall bloodstock sales, starting with the just-completed OBS
mixed sale, which was a disaster for sellers.
Even
scarier, for breeders, is the way they're being squeezed between ever-higher
stud fees and costs, on the one hand, and diminishing auction returns on the
other. In a fascinating
analysis, first published
in the Thoroughbred
Daily News on October 3rd,
Rob Whiteley, the owner of Liberation Farm and one of Kentucky's smartest
breeders, concludes that only 18% of the yearlings offered at this year's
Keeneland sale returned even a nominal profit to their breeders, after taking
into account stud fees, costs of keeping the mare and raising the yearling, and
costs associated with selling the yearling at Keeneland. On the final day of
the sale, September 23rd, not
a single sale was profitable, according to Whiteley's analysis.
So,
between the decreasing profitability of sales yearlings, increasing costs,
especially for hay, alfalfa, feed, fuel and fencing, and the credit squeeze
arising from the banking system's meltdown, many small breeders will
undoubtedly face some tough times this winter, and many will probably decide
that they just can't afford to stay in business any longer, waiting for that
one great horse that all of us in the business hope for. Whiteley proposes a one-year interim
relief plan that would have the auction companies, stallion owners and
sales-oriented vets all cut their fees by 50% Don't hold your breath
waiting for that to happen. The
reality is that some breeders will be forced out of the game. In the long
run, that may help reduce the excess thoroughbred population, which wouldn't be
a bad thing. But in
the short run it means that a lot of people who've put their whole lives into
caring for race horses will be facing a dismal future.
Handle
There
are two things that matter about handle: how much it is, and where it comes
from. In the good old days
- before OTBs, casino race books and internet wagering - handle was what was
bet at the track where they ran the races, and the whole of the takeout went to
the race track operator and to purses for the horsemen. Now, barely 10% of total handle nationwide
is bet at the track. The rest comes from other pari-mutuel sites - thoroughbred
and harness tracks, dog tracks, jai alai frontons - from OTB operations, from
casino race book betting and, increasingly, from internet-based advance deposit
wagering sites (ADWs). And when money is bet at those off-track locations, only
a small fraction of the takeout finds its way back to the track whose races are
being bet on. When
simulcasting was first introduced, most track operators treated it as "found
money," and were happy to sell their signals for 3% or less of the handle, even
if their own takeout rates were 15-20%. That
left a lot of money on the table for the off-track operators, and for rebates
to the high-rolling "whales" who placed their bets through those sites.
So,
with the mix of where bets come from shifting more and more away from the
track, increases in handle no longer translate into more money for purses,. And
when handle declines, as it's doing this year, but bets continue to shift
off-track, as is also happening, there will inevitably be a real squeeze on the
purse account.
In
many jurisdictions, that squeeze has been temporarily averted by filling the
gap with slot machine revenue, or "in lieu" payments from casinos anxious to
avoid competition for the slots dollar. But
that's pretty much like putting fingers in the dike while the ocean surges over
the top of the levee; it won't hold off the inevitable forever.
There
are only two ways to fix the situation: increase handle overall or take a bigger,
fairer percentage of the handle on off-track bets and return it to the track
where the races are being run. Probably
we need to do both if we're going to keep the game alive. Certainly, we need to do the obvious
things to make racing, and betting, more accessible and more fan-friendly:
allow anyone to bet on races anywhere through a single account; get the good
races on television channels that are accessible to everyone; get rid of
admission and parking fees at the track; lower takeout to some optimal level
that maximizes the ability of players to keep playing; coordinate the major
stakes races and figure out a way to make the whole season, or at least
April-October, something that fans can appreciate and where they can follow
their favorites.
But
we also need to get a fairer division of the dollars between the places where
the races are run and where the bets are made. That's what the Thoroughbred
Horsemen's Group, which has been advising horsemen around the country in the
latter's negotiations with race tracks, has been doing. Their basic model
is splitting the takout three ways - the betting outlet, the sending track, and
purses at the sending track. THG,
though, is willing to make exceptions that will keep the whales in the game,
adjusting for rebates where that's what's needed to get the big bettors to
play. And, even though the
THG formula would benefit the tracks themselves, Churchill Downs, Inc.
stubbornly opposes it, and is locked in ongoing feuds with horsemen at its
tracks, especially Calder and Churchill itself. Now why should that be? Oh, right,
Churchill owns its own ADW, Twin Spires, so the more betting it can direct
there, as opposed to having the bets made at the track, the less it has to pay
over to purses. Churchill
sees its future as being an internet wagering platform, which just happens to
own a few race tracks as a way of guaranteeing that it will have a product to
bet on. And these guys hold themselves out as some sort of keeper of racing's
heritage. Shame on them.
Purses
Despite increasing costs, overall US purse levels have been
pretty stagnant for years, at about $1.2 billion, or roughly 7-8% of the total
handle. This year, though, looks like being the first with a
measurable decline in purses, if current trends continue. Horsemen at the
Churchill Downs Inc. tracks have been particularly hard-hit, but, aside from
the boutique meets at Keeneland and Saratoga, it's hard to find anywhere where
track operators can actually have a reasonable hope of making more than it costs
to open the gates. Nationally, something like nine out of 10 horses lose
money for their owners, taking into account what they cost to breed or purchase
and what it costs to keep them in training. So, it would seem that rational
economics would say that purses need to be higher, or else owners wouldn't
supply their horses. But little about the racing business is rational (but,
oh yes, that seems to go for banking and Wall Street, too, these days).
So,
how do you make a small fortune in racing? By starting off with a big
fortune. There are only a
couple of viable business models. At
the high end, Coolmore can spend $40 million a year for well-pedigreed
yearlings, and if one or two turn into Grade I winners, they'll make all that
back by breeding the horse 250 times a year at an inflated stud fee. And
at the low end, maybe you can scratch out a living at Mountaineer or Charles
Town if you keep your horse in the back yard and it stays sound enough to run
every two weeks. But in
between, most of us can expect to lose money. For the rich, that probably doesn't
matter; they're in it for the glory, not the money. But for most of us, it would just be
nice to have a decent chance of breaking even.
So,
how do we increase purses? Essentially,
the same way we increase handle,. Everyone
basically knows what should be done; more fan-friendly tracks, better
coordination among tracks, better TV programming, easier access to betting
platforms, keeping the stars of the game racing at ages 4 and 5, getting a
bigger share of the takeout on simulcasts, OTB and ADW betting for the purse
account. But it's a question of either getting the people who control racing's
various fiefdoms to work together or getting them out of the way. Perhaps,
now that the idea of federal regulation is resurgent in some other areas of the
economy, we might think about it again for racing, too. Or then again, we might
just set up a real commissioner's office, which I guess was what the NTRA was
intended to be, before it ran afoul of people protecting their turf.
No, racing isn't immune from the effects of what's
laughingly called the real economy. And we're starting to see the signs
of that economy's impact on our little corner of the world. Let's hope
most of us weather the storm and always have a two-year-old in the barn to
dream about.
