The Camel is in the Tent - By Eric Mitchell

By Eric Mitchell - @EJMitchellKy on Twitter

The U.S. racing industry should watch closely what’s happening with slot machines and racetracks in Ontario because the trend could easily spread south. Some may argue it already has.

Ontario’s racing industry took a sobering blow March 13 when the Ontario Lottery and Gaming Corp. announced an end to the 14-year “slots-at-racetracks” program. What this means is, with a few exceptions, slot machines will be taken out of most of the 17 racetracks operating in the Canadian province that arcs over the Great Lakes, stretching from New York to Minnesota. Not only will slots be relocated to stand-alone casinos, but horse racing’s share of slots revenue is also expected to disappear.

When Ontario first authorized slot machines, the government negotiated with track owners who were concerned the new casinos would poach revenue from racing. Acknow­ledging the horse industry’s value to the overall economy, the Ontario government allowed racetracks to keep 20% of their slot revenue.

The revenue-sharing arrangement appeared to be successful. According to Ontario Lottery and Gaming financial statements, the government is receiving $1.1 billion annually from the slots-at-tracks program. Meanwhile the Ontario horse industry now supports more than 31,440 jobs and up to 60,000 jobs through related industries. The total agricultural expenditures from the horse industry are nearly $2 billion in Ontario alone, making it the second-largest agricultural industry in the province.

Now this revenue-sharing arrangement is being called a subsidy by Ontario Finance Minister Dwight Duncan. The government wants to modernize its casinos and relocate the machines from under-performing tracks. The prime motivation behind these changes is to head off a $16 billion budget deficit being projected by 2017-2018. Slots revenue at some tracks has declined in recent years, particularly those tracks near the Canada-U.S. border. Already tagged to close are the racinos at harness tracks Windsor Raceway and Hiawatha Horse Park, plus Fort Erie, site of the Prince of Wales Stakes, the second leg of the Canadian Triple Crown.

Hiawatha, about 50 miles north of Detroit, at its peak received $2.4 million in slots revenue and is expected to get $1.5 million this year. For now, Toronto’s Woodbine Racetrack and Mohawk—both owned by Woodbine Entertainment Group—have not been chosen to lose their slots casinos and it seems unlikely they will be. No guarantees, however.

The widespread growth of casino gaming in the U.S. is a big reason Ontario is reevaluating its casino industry. In 1978 Americans could find a casino in only two states—Nevada and New Jersey. Today casino gaming exists in 36 states. Besides racinos, the country has 450 Native American-owned casinos. American casinos, particularly in Pennsylvania, are digging into Ontario’s gaming revenues.

When casinos and racetracks first joined forces in 1990 in West Virginia, many in the industry speculated that racing was allowing the camel’s nose inside the tent. Once racetrack operators saw how much money could be made with slots and table games, some wondered, will they continue to support the racing side of the business? We’re getting our answer.

Bob Evans, chief executive officer of Churchill Downs Inc., said recently during a fourth quarter conference call: “While (Thoroughbred racing) is what our brands mean, it no longer is our business model in terms of how we will grow and earn an acceptable return on our shareholders’ investments. Our business model has changed dramatically.”

When New York announced it intended to expand non-Indian casinos, Gov. Andrew Cuomo immediately shot down any expectation that these would go to racetracks. Instead, he said, he wants destination, Las Vegas-style casinos and has suggested the existing revenue-sharing splits for the track casinos need to be examined. He has even questioned deals that have permitted the tracks to have casinos in the first place.

The camel is clearly in the tent, and racing must deal with it.

Racing will have its hands full fighting these changes, but it cannot allow government leaders to lose sight of what makes racing different from casinos. Horse racing is not just about gambling. The racing industry supports a widespread and vibrant agricultural industry that provides a living to thousands of middle-class farm owners, provides a mix of skilled and unskilled jobs, and serves a valuable role in land management and conservation.

Racing did a great job selling the benefits of casino revenue 22 years ago. Now it has to sell itself.