Friday, February 11, 2011

I Don't Feel Dead

From Paul Moran at ESPN to Richard Eng at the Las Vegas Review-Journal, reaction to Penn National CEO Peter Carlino’s comments about his racing patrons has been thoughtful and pointed - certainly more thoughtful than Carlino’s comments were. In case you haven’t heard in speaking to investors and financial analysts during a conference call Carlino said of his company’s racing patrons, “There aren’t sufficient numbers of racing customers because they have died.”

Moran doesn't begrudge Penn National's success.  He writes,“The Penn National leadership should be congratulated for an aggressive expansion beyond its roots as operator of a backwater racetrack in Pennsylvania to take a place among the nation's leading gaming companies. It generated nearly $2.5 billion in revenue last year. But its corporate view of racing -- minor if adjunct to casino gaming rather than the core product -- has made it impossible to discern the tail from the dog.”

The issue boils down to public corporation ownership of racinos. There is one thing that shareholders demand: growth. If you’re not growing, you’re dying. I'm not saying that running a racino with a commitment to racing as a publicly traded company is impossible, just difficult.  Racing simply cannot provide the kind of explosive growth that slots can. Once that money starts rolling in the call from shareholders is more, more, more.  That pressure is hard to combat, though one way would be to declare a dividend and position yourself as a mature, income producing investment rather than a growth instrument.  Most companies won't look at it that way and are subjected to the pressures of growth from the marketplace (Penn National, Churchill Downs, Boyd Gaming to name a few), though I do hope and think that should my home track, Canterbury Park, becomes a racino they will be able to navigate this minefield better than most.

Slot machines require little labor. They can go 24/7 with a minimum of effort. You can rake in $200 in profit per machine per day and keep your expenses as low relatively low. No matter how you slice it, racing is a labor intensive industry. Horses need care every day of the year. They don’t groom themselves and they can’t go over to the track and make sure they go five furlongs in a minute and change. They can’t load themselves into the gate and they can’t give themselves examinations. A backstretch consumes tons of feed which needs to be grown, processed and delivered. The waste product needs to be collected and disposed. The statistics used in handicapping is gathered by humans working at hundreds of racetracks and training centers around the country. There is no way to trim this down and I'm leaving out plenty of people.

Carlino may think that all horseplayers are all dying but, as Moran points out as well, your typical slot player demographic isn’t much younger. The challenge facing casinos is similar to the challenge facing racetracks: make the product appealing to younger players. The average slot player is still a woman in her 60s.
What’s the solution? If it were possible to raise the money, I would buy a racetrack and run it as a non-profit. Hear me out. That does NOT mean we wouldn’t want to make money, just that we would run as a non-profit.  Purses would be excellent and we would make sure that the money went back into the facilty and operation. Here is how I see it working:

Horsemen own the racino. Of course the state would take their cut, as states involved with gaming do, but the cut would be reasonable. Not the joke that passes for a gaming tax in Nevada (while teachers get laid off and public services suffer) or the punitive tax proposed by Kansas which birthed a stillborn racino industry. Somewhere along the lines of 30% seems fair and reasonable to me. Let’s say we have a 2,000 slot racino earning $200 per machine per day – not an unreasonable assumption outside of Nevada and, in fact, very conservative. That would generate nearly $44 million a year for the state and just over $100,000,000 for the track. Combine that with handle on live racing and simulcasting and you have a successful 100 day meet. 

We'd race four days a week from April through September making sure that we run in the evenings on weekdays. Hell, while I’m living in fantasyland, having a racetrack in the north and the south would create a circuit with race dates in the south from October through March. There would still be competition from casinos and other entertainment options and therefore a need for quality food and beverage, outstanding customer service and clean comfortable facilities. The quarter to quarter pressures of a public company would be gone, however, replaced instead with a commitment to horsemen, horses, agriculture and community service. Far-fetched as this may sound, it does exist, sort of, in Iowa at Prairie Meadows. The difference there is that the non-profit is not racing but community based so the pressure there is to close down racing so there can be more money for the county, the purpose of opening the racino in the first place to promote the horse industry and agriculture forgotten amid the swirl of slot money.

The point isn’t so much the way the numbers above calculate but that the pressures the operation would be under would be entirely different than they are today under a Penn National or Churchill Downs. There are no shareholders clamoring for constant growth. No hue and cry to get rid of that high expense racing product to add more slot machines. There would be money for the state, money for the horsemen and money for the bettors (takeout should be able to be held to more reasonable levels than it is now).  There could even be money for horse rescue, injured jockey funds, backstretch workers and other racing and even community based charities.  I know I’m taking more Utopia than reality since these pressures would be sure to be replaced by others, human nature being what it is, but it is going to be very difficult for any public company, no matter their commitment to racing, to resist the call of shareholders for greater growth once they get a taste. After all, I remember when Penn National was just a crappy racecourse in Grantville, PA.

According to the Thoroughbred Times, national handle in 2010, while down, was still over $11.4 BILLION. Those of us among the living are betting that money, Mr. Carlino, and if you don’t want a piece of it, I’d be glad to run a racino that would take it off your hands.

1 comment:

Anonymous said...

As absurd as this idea may sound the the basic listener, non-profit ideas like this work. You only have to look as far as last week's Super Bowl to realize that being a non-profit doesn't mean that you're not able to compete. And you don't have to worry about private interests moving your team.
I like the idea that you present because it puts the power back in the people's hands instead of private investors who are solely in the business to make their buck quick (stock market theory).
Obviously this would require a lot of fund raising upfront and would probably be hard to convince owners away from their home tracks until the track becomes established.
This is a great article that makes me think of the business behind the racetrack.