The State of the Racing Economy

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 reportnationwide 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 The rest either failed to meet their reserve or were withdrawn by the consignors  -- some for injury, but many because the market was weak.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 23rdnot 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.


 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.


 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.

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