Declining Action

First the good news: Breeders' Cup nominations for foals born in 2005 were up, reaching an all-time high of 16,183. Also on the increase was the number of 3-year-olds nominated to this year's Triple Crown. The 427 nominees represent a 19% jump from 2005, even though the $5-million bonus for winning the Triple Crown has been dropped after Visa USA's decision not to renew its sponsorship of the series.

Those two developments tell us what we already knew: racing's biggest days are more popular than ever with fans, owners, and industry professionals.

Now for the bad news: Pari-mutuel handle and purses for racing in the United States, the two most important leading economic indicators, were down in 2005. It was the second consecutive decline in handle and the second time in three years purses have fallen. Because the revenue racetracks derive from betting dollars is on par with that of purses, you can assume there is little joy among track owners.

Handle on American races reached $15 billion for the first time in 2002, but it's gone south since then, falling to $14.6 billion in 2005, a 3.4% decline from the previous year. Purses reached $1 billion in 2000 and flatlined over the next six years. The 2005 total was $1,080,742,875, a 1.1% decline from the previous year. That number would be considerably lower were it not for purse revenue generated by slot machines.

The National Thoroughbred Racing Association, which released the year-end figures in conjunction with industry record-keeper Equibase, pointed to bad weather as the culprit: hurricanes in the Gulf Coast, rain in California, and tornadoes in the Midwest. But the real blame lies with the pari-mutuel industry's failure to adequately address some of the key issues that have plagued horse racing since the turn of the 21st century.

Offshore bookmakers and betting exchanges have grown enormously with the popularity of the Internet. Not a penny wagered on U.S. horse racing is returned to the industry from these parasites.

Only slightly more redeeming are the offshore and Native American rebate operations, which gain legal access to betting pools through simulcast contracts signed by foolhardy racetracks and horsemen's organizations. The net effect of the rebaters, who poach existing customers from tracks and off-track betting shops, is reduced revenue to the tracks and horsemen's purses. An on-track bet or simulcast wager made through a racing association or OTB returns at least 15% to the tracks and purses. A wager made through a rebater returns 3-5%.

This significant leakage of revenue to bookmakers and rebaters was first brought to light in 2000. Nearly every member of racing's organizational alphabet soup (HBPA, NTRA, RCI, TOBA, THA, TRA, TRPB) has looked at the issue, discussed it, and wrung their hands over it. The NTRA, through its Wagering Systems Task Force, issued a 111-page report on the subject--"Declining Purses and Track Commissions in Thoroughbred Racing: Causes and Solutions"--that was met with a thunderclap of indifference.

Ignoring the problem is not going to make it go away. BetFair, the biggest among the betting exchanges, hasn't targeted American gamblers yet, though the company is brazenly taking wagers on U.S. racing from its worldwide customers without authorization. BetFair's potential encroachment on these shores and its impact on revenue are a frightening thought.

Who will take the lead? The NTRA, in its strategic plan for 2006-2010, said there is no easy fix to stagnating industry economics, and simply referred to its existing task force report. No one else is stepping forward with a plan.

Racing has a problem with declining economic indicators. But the real crisis is its inability to take action.