Strength in numbers: horsemen negotiate for bigger share of the pie.
Thoroughbred Horsemen’s Group (THG), formed in December 2007 and based in Lexington, Ky., represents most Mid-Atlantic owners and trainers.
by Joe Clancy

The math of Thoroughbred racing could make an MIT student’s head spin, but no one denies the importance of the various numbers involved in the sport’s funding. Simply put, race tracks, horsemen, bettors and account wagering providers all rely on the revenue generated by wagering handle.

And the numbers matter. The Jockey Club estimates total Thoroughbred pari-mutuel wagering handle to be $15 billion nationally. With a blended takeout of 20 percent, that’s $3 billion to parcel out in various directions.

Division of that revenue is one reason why 20 (so far) horsemen’s associations have joined the Thoroughbred Horse­men’s Group, which formed late last year.
Horsemen saw a need for collective negotiating power with race tracks, especially on the issue of advance deposit wagering (ADW) companies. The group’s members include horsemen’s associations from Mid-Atlantic racing states Mary­land, Delaware, Virginia and Penn­sylvania and all see value in the new formula.

“ We signed up because the problem exists where it becomes impossible for each local entity to adequately negotiate the hundreds of contracts that exist,” said Richard Hoff­berger, president of the Mary­land Thoroughbred Horse­men’s Association. “Horse­men were coming out on the short end of the stick. We didn’t create (THG), but we listened when it was created.”

“ We felt like we needed some help here with our simulcasting rates and some of the things that were going on,” said Bessie Gruwell, executive director of the Delaware Thoroughbred Horsemen’s Association, which is a founding member of THG. “They were a perfect fit for what we were trying to accomplish, so we jumped right in. There is strength in numbers, unity. If every horsemen’s organization is going to allow THG to negotiate for them, we’re going to be better off.”

The new organization provides expertise for horsemen across state lines.
“ Put it this way, every race track has a simulcast coordinator whose job is to sell the signal and maximize it,” said Joe Santanna, president of the Penn­sylvania Horsemen’s Bene­­volent and Protective Associ­­ation, another founding member of THG. “The Penn­sylvania HBPA couldn’t afford to hire a simulcast coordinator or anyone that competent to look out for our interests. THG provides us with expertise to examine whether we are getting our fair share of the simulcasting dollar. To their credit, horsemen’s groups are getting savvy about this. We don’t want to just rely on race tracks in this area anymore.”

“ Specific to Virginia, hopefully this gets us a slightly better deal than we have now with ADWs,” said Frank Petra­malo, executive director of the Virginia HBPA, also one of the founding members of the THG. “Basically, we concluded that the simulcasting model was broken. Too much money was leaving the industry, particularly with the advent of ADWs. But the important thing about THG is not so much your one state, it’s horsemen’s groups and tracks in other states. You support the industry as a whole when you support THG.”

Though formed with a broader mission of representing horsemen in negotiations and protecting horsemen’s interests, THG adopted as its first task ADW contracts?–?specifically the takeout split among race tracks, ADWs and purse accounts. ADWs allow bettors to keep money in accounts and bet via the Internet or telephone, and are a rare growth sector in Thoroughbred racing.
Total national wagering has held relatively steady for several years, but the portion of that figure taken in by ADWs continues to increase.

And that’s the sticking point.
An ADW bet typically doesn’t return the same amount to horsemen’s purse accounts as a bet made at a race track, because of varied simulcast laws, different rules and individual contracts. In extremely simplified terms, for every dollar bet on a Thoroughbred horse race, 80 cents goes back to the bettors and 20 cents is taken out for various purposes (purses, breeders’ funds, race track operations, taxes, etc.).

On a bet made at a race track or simulcast facility, the 20 cents gets divided between the host track and the track that takes the wager?–?with a share to horsemen’s purse accounts at both tracks. On a bet made with an ADW company, the host race track gets a fee (which is shared with horsemen) and the ADW company keeps a fee (which is not shared with horsemen). The model gets more complex?–?and requires stickier negotiations?–?when race tracks own ADW companies as is the case with Churchill Downs (Twin Spires) and Magna (Xpress­Bet).

“ For horsemen, a central entity negotiating the contracts makes us all better,” said Hoffberger. “It’s a different situation than it used to be. Conceivably, you could have four or five levels between the bettor and the race track.”
Everyone agrees that ADW bets have become a bigger piece of the marketplace, without necessarily increasing the overall wagering total that much, and that’s the main reason horsemen see a need for a new model.

“ Total handle is staying the same, but horsemen are getting less because the bets are being taken under different rules,” said Wilson Shirley, THG manager and a former consultant to the Thoroughbred Owners of California.

“ Purses paid are going up?–?more from slots and other areas, not pari-mutuel wagering. The idea is that pari-mutuel wagering has got to support horse racing. We can’t rely on subsidies to stay in business, and we have to change the model for account wagering first to ensure revenues are not going to go down.”
THG wants to split the takeout equally between purse account, host race track and ADW company. The THG and some tracks also see the benefit of opening the racing product to more ADW companies, and limiting the exclusive contracts that can exist now. THG sees increased revenue coming from an expansion of ADW opportunities for bettors, but not without a new model.

“ Our approach is to develop a framework under which all ADW companies and all horsemen’s groups can subscribe to the general terms that work for THG members, their tracks and the ADWs,” said Shirley. “Individual horsemen’s groups have negotiated specific, one-off deals but that’s not the best approach. We want to change the model by implementing a framework for the whole ADW sector.”
By pooling together, THG says, horsemen can help ADW companies acquire more content?–?expanding the opportunity for bettors and thereby increasing the total handle. Under the current system, a bettor may need accounts with several ADW companies to wager on the various tracks around the country.

Reactions to the new thinking have been mixed, though some have been steadfastly against changes advocated by THG.
Representatives of some race tracks and ADW companies have criticized THG for its position. And Churchill Downs Inc. (which owns four tracks and an ADW company) filed an anti-trust lawsuit in July. The case is still in court, but was answered by a motion for dismissal by THG attorneys.

Through spokesman John Asher, Churchill declined to comment for this article. The lawsuit contends that horsemen violate federal anti-trust laws when they pool together via a group like THG and coordinate negotiations. Shirley said THG went to great lengths to satisfy anti-trust questions before forming and is “pretty confident” the court’s decision will land in favor of the horsemen.

Chris Scherf, executive vice- president of the Thoroughbred Racing Associations, disagrees and called anti-trust possibilities a key point in discussions between THG and race tracks.

“ There’s no middle ground with anti-trust and if what they’re engaged in is anti-trust that’s a problem for race tracks,” said Scherf. “Tracks can’t be partner to anti-trust.”

Scherf said race tracks could be sued for working with THG, if the organization is deemed in violation of anti-trust laws. Anti-trust questions arise because of the collective bargaining on a national basis. Individual state horsemen’s groups have a right to block simulcast signals under the Inter­state Horse Racing Act, but that law does not eliminate the anti-trust risks.

“ There’s no dispute that individually each state horsemen’s group has a right of consent so that if the track negotiates a deal they don’t like, horsemen have a right to ask for a better deal,” said Scherf. “Bringing the weight of horsemen’s groups nationally to bear seems problematic legally and operationally. They have made mention of minimum pricing and they’re doing this in a collusive methodology. We won’t know exactly whether it’s anti-trust or not until it’s adjudicated, but it’s a grave cause for concern.”

With the consolidation of race track ownership, the increase of ADW handle and the creation of a partnership between Magna and Churchill (called TrackNet) to manage racing content such as simulcast signals, THG organizers see the need for consolidation of their own.

“ There has always been an anti-trust cloud hanging over horsemen’s groups because of the veto right under the Interstate Horse Racing Act,” said Bob Reeves, THG president. “Can they talk to each other about pricing or not? It’s really up in the air, but it goes back to who is the customer? I argue it’s the guy making the bet. We’re not arguing about the price he pays, we’re arguing about how the price gets shared.”

Under the Interstate Horse Racing Act, horsemen’s groups have used their right to block simulcast signals this spring. The Florida HBPA refused to allow the Calder simulcast signal to be sent to tracks outside of the state and Calder’s races were unavailable to most ADW providers. The result of 11 weeks with limited wagering (some simulcast signals were blocked from coming into Calder as well) was a sharp decrease in handle and ensuing cuts in purses. The horsemen and Calder reached an agreement on purse and slot-machine contracts by July, but the ADW contract is still being negotiated.

In Kentucky this spring and summer, the Churchill Downs simulcast signal was unavailable to many ADW companies and Ellis Park opened its meet five days late because of a dispute over the contracts.

Still, from its point of view, THG has seen some success. It advised Kentucky horsemen in negotiations with Ellis Park and the resulting new contract meant increased purses, though the increased share came out of the race track’s portion of the ADW contract. Frank Stronach, whose Magna Entertainment Corp. owns nine Thoroughbred race tracks, including Laurel and Pimlico in Maryland, spoke favorably of THG in a company press release.

THG gave a presentation at the International Simulcasting Conference this fall in Florida, leaning on the various numbers in the formula and making a case for a different split on ADW bets. Representatives on the other side fired back that ADW companies would not be profitable if the contracts changed, and that horsemen have not negotiated as partners.

“ Obviously, account wagering companies are not going to like what we’re doing,” said Bob Reeves, THG president. “They’re capitalizing on a situation and an industry that’s very slow to change. The simulcast model was never intended to apply to an account wagering system. We’ve taken that same model and applied it to account wagering. It doesn’t surprise me at all that they want to maintain the status quo.”
Scherf sees potential in tracks asking for more from ADW companies, but also cautions about pushing too far.

“ Holding race tracks’ feet to the fire to make sure they take an aggressive stance is important, but (ADW companies) have significant costs,” Scherf said. “At the end of the day, there is a point where it wouldn’t be economically feasible to be in this business if we charge a certain fee. What that number is I don’t know.”
THG maintains that the number should grow.

“ This is not a fight between horsemen and race tracks and I don’t know why it’s been framed that way; it’s not what we want,” said Shirley. “There has been an insufficient return from the account wagering sector to the tracks and purses that are responsible for putting on the races. We’re trying to reform that model to produce a fairer return to tracks and purses.”

Scherf called simulcast contracts a balancing act that needs to support all of the players adequately. He said tracks welcome horsemen’s input, but would prefer local negotiations to a national approach and a hard-line attitude.

“ There is an economic ecosystem at play here and you want to take care of the people who are producing the racing but at same time you have this distribution network you need to keep in place,” he said. “Horsemen being more involved on a local level and agreeing they need to get more is fine and prudent. Race tracks have not been intentionally underselling their signals for the purpose of decreasing their own revenue. The market calls the shots and you have to make decisions.”
Scherf pointed to negotiations this summer that resulted in a new simulcast deal between NYRA and the Mid-Atlantic Cooperative (a group of 16 tracks and simulcast outlets) as an example of what can happen under that climate. He criticized the Ellis Park contract as a “short-term” fix and said the Calder situation turned out badly for all involved.

“ There are lots of good, valid questions and input that could come from horsemen’s groups but the manner in which it’s been done, with THG to act alone, and with something of a scorched earth policy as it did at Calder is not positive,” said Scherf. “Horsemen wanted to make a point that they want input in what tracks are doing and actively use the right of consent. That’s all to the good. The tactic that’s being used now is not productive.”

Despite some of the disagreements, Reeves and other THG representatives go out of their way to say they want to work with tracks. THG calls horse owners and race track owners the major stakeholders in the industry. One group invests in horses. The other invests in race tracks. Without health from both stakeholders, the industry shrinks.

“ We’re all about a fair contribution to purses on wagers taken by an account wagering company and we’re all about a fair contribution to race tracks on wagers taken by an account wagering company,” said Reeves. “I feel like we’re taking the high road and we’re being fair?–?we’re proposing to be equal partners with the race tracks and the account wagering companies.”

Reeves lives in Nashville, Tenn., and pointed to a similar shift in the music business. For years, recording studios and artists clashed with Internet sites that offered music downloads and customers who used such sites. Now, online music stores are a staple with industry buy-in and revenue sharing.

“ We need to change our economic model and adapt to a new distribution system, like the music industry did,” said Reeves. “Can it work? Yes. It’s got to work.”