Churchill Monitors Online Gaming Landscape

With its experience in operating the advance deposit wagering Internet site TwinSpires.com, Churchill Downs Inc. has been preparing to participate in other Internet gambling opportunities for some time.

Now the company's experience with dealing with state-to-state regulations on the gaming side could prove useful.

While supporters of Internet gambling once envisioned a federal law to open Internet gaming across the U.S., proposed legislation in Washington has stalled. But at the state level, things have picked up with Nevada and New Jersey recently approving Internet gambling. Churchill is interested in participating regardless of the regulatory framework.

In a conference call with investors and analysts Feb. 28, Churchill Downs Inc. president Bill Carstanjen said the Louisville company will be prepared to adjust to the changing regulatory framework.

"The online gaming landscape is evolving very, very quickly and probably much more quickly than any of the experts might have expected say a year ago," Carstanjen said. "With the dearth of true federal progress, what you're seeing are states exploring these issues on a state by state basis. You've seen the passage of laws in New Jersey and Nevada. There are a number of other states, like Illinois and California that are very large states, that are seriously considering state-driven online gaming legislation."

Nevada and New Jersey approved Internet wagering—poker and possibly casino-type games—at the intrastate level but state compacts could allow players from multiple states that have approved Internet wagering to participate.

Pari-mutuel wagering is one of the few online gambling forms currently allowed in the U.S. and Churchill owns the successful TwinSpires.com site. The company believes that experience will help it gain a foothold should Internet gambling be expanded to allow it to offer games like poker.

Racing is regulated at the state level. As an owner of Thoroughbred tracks in four different states, Churchill has experience in this regulatory framework. Carstanjen said the company is keeping an eye on every twist and turn.

"That general field of activity is something we're spending a huge amount of time and attention on," Carstanjen said. "Like a lot of companies in our position, we're trying to figure out how we would play and how these states will end up playing with each other, in terms of sharing liquidity on games like poker, etc."

Carstanjen said the company will be ready whether a state-by-state regulatory framework takes shape or the federal government steps in.

"The way we approach that topic is to be prepared as possible for any eventuality," Carstanjen said. "I know for a number of years there was speculation that it would go federal. Now the tide has turned and the only activity you really see is state by state. Our focus right now is preparing state by state action plans.

"Obviously it seems like there will be some states where we can participate and obviously there will be some states where it would be much more of a stretch for us to find a way to participate. But right now we're focused on addressing the state by state opportunities. That doesn't mean we stop preparing federally. We still have the same resources deployed federally, the same action plan up on the shelves that we would use in the event that the feds take action."

Late last year, Churchill expanded its Internet operations with the launch of Luckity.com. The site provides real-money wagering on horse races through games that allow players to select the numbers of their horses. For instance, the games may involve popping online balloons to select numbers. The company spent $800,000 in the fourth quarter of 2012 launching Luckity.com.

Carstanjen said the company is still working with its customer base to improve the site.

"We haven't started marketing really heavily yet because our focus to date really has been on the quality of the product," Carstanjen said. "We're spending time with the customers we have acquired to understand what they like about it and what we ought to improve."

Carstanjen said Churchill has noted the popularity of social gaming in the U.S. and the explosion of online gaming throughout the world.

"We wanted to take the skills and capability we've built at TwinSpires and move into a new area and use those skills to reach a different customer set," Carstanjen said. "There has been a lot of learning and some hiccups too. Before we really launch in earnest any kind of marketing, what we've found is that we really need to fill the gap between when the customer plays the game and when the customer gets the result; and then actually, the quality of the games. We have to make them more interactive, more appealing.

"It's fair to say that there are a lot of encouraging signs that we've seen so far. With very little marketing, we've not had trouble acquiring customers. But really the focus needs to be on keeping those customers, getting them to redeposit, keeping them engaged when they're on the site. When we have those tasks achieved, then we'll go further and market with serious earnest."