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Rating Racinos

Is horse racing being impacted at all by slots and other gaming located at racetracks?

Rating Racinos

If a random first-time visitor had made the trek to Hamilton Downs, 90 miles east of Tallahassee, in the summer of 2014 to see one of its “flag drop” races, he would have been in for a bizarre experience: an open field track, no grandstand, a small shed for placing bets and a race consisting of a group of horses sleepily trotting from Point A to Point B.

“Tired, reluctant, skittish or disinterested horses moving at a slow pace down a dust-choked path,” described an administrative law judge in a ruling after the state’s parimutuel regulators complained that the races lacked “speed” and therefore did not count as real races under their license agreement.

“The overall quality of the videotaped races was about what one would expect of an entry-level campers’ horse show held at the conclusion of a two-week YMCA summer camp,” the judge wrote, though he ultimately ruled that Hamilton Downs had satisfied the legal definition of a “race” and therefore could not be sanctioned by the state.

Stories of such “sham” races in Florida have cropped up frequently in recent years, with racetracks like Hialeah Park, Oxford Downs and Gretna—the flashpoint in a recent Florida Supreme Court case ruling against placing slot machines in racetracks outside Miami-Dade and Broward counties—holding events more designed to check a box than to attract patrons and show off the sport in all of its splendor.

The rationale for Hamilton Downs and the others to hold such farcical races is simple.

If they want to offer other, more attractive and profitable forms of gambling, then pursuant to Florida law, they must hold a certain number of races each year. But because customer interest is dwindling and the operators lose money on each race, they have an incentive to run them on a shoestring budget to whatever extent they can get away with.

“What you have in Florida is a lot of lawyers who have made quite a living taking advantage of loopholes in the law, and that’s what’s created a lot of this confusion,” says Dan Adkins, president of Mardi Gras Casino in Hollywood, north of Miami. “If you think this is a dysfunctional industry to start with, you’ve seen nothing like Florida.”

Indeed, the very existence of such races highlights several of the bizarre and convoluted aspects of the environment in which racinos currently operate.

They sit at the precipice of an existential crisis—one driven by declining interest among bettors and the general public, increasing competition from other forms of gambling and entertainment, outdated public policy that hasn’t allowed the activity to evolve and intra-industry discord that has prevented it from advancing its agenda when it has needed to.

“These scams of flag-drop racing and barrel racing just to allow yourself to have a poker room under Florida law, that’s been the result of this dysfunctionality within the industry and not being able to work together to get anything accomplished in Tallahassee,” says Adkins.


Downward Spiral

Racing nowadays is by and large a money-losing proposition for all but the largest and highest-profile operators because of its high overhead costs and the minimal enthusiasm it generates among the betting public.

“There is dwindling interest in parimutuel wagering in every jurisdiction in the country. It doesn’t exist anymore, and without other products the brick-and-mortar facilities can’t survive,” says Adkins.

Jeffrey Gural, owner of the Meadowlands Racetrack and a leading proponent of a casino in North Jersey, reckons that if more dollars and creativity had been invested on the marketing front 10-15 years ago, the situation today would be quite different.

“We have an interesting product. Look at NASCAR and some of these other things where they put TVs in the guy’s helmet and you see a crash in real time. We could have done some of those things and exposed our product to the public,” he says. “I would venture to guess that few people even know harness racing exists.”

A failure to attract and retain the interest of young people, who have a multitude of other entertainment options to choose from, seems to indicate that a miracle turnaround is not on the horizon.

“Unfortunately, horse racing throughout the whole country is on a downward spiral. It doesn’t click with millennials at all,” says Ed Sutor, president of Dover Downs in Delaware. “The only people in the grandstands are people who are much older who know how to handicap. We just can’t seem to attract younger folks.”

Gural concurs: “I think it’s no different than ‘Why don’t they go sit in front of a slot machine?’ They just don’t. It doesn’t appeal to them, and it’s not likely to appeal to them anytime soon.”


Subsidy Lifeline

Despite these problematic trends, laws remain on the books in many states requiring that racinos hold a certain number of races per year, and that those races be subsidized by a racetrack’s other gambling operations to the tune of $400 million a year nationally, according to the Thoroughbred Racing Association.

The existence of these requirements and subsidies are the source of major questions regarding the future of the racino industry.

Horsemen’s groups and breeders say that the subsidies are the lifeblood of their business, but many operators say that as wagering interest continues to decline and gaming markets become more competitive and saturated, being forced to race horses or dogs and subsidize an antiquated product that customers don’t want makes little sense.

“It’s like if Ford Motor Company had the same kind of regulatory body, and they said to them, ‘Look, you can build all the popular F-150s you want, but you’d better keep building that Model T; otherwise you’re out of business.’ It’s the same thing going on here,” says Adkins.

“When a product doesn’t move off the shelf anymore, you put a different product on the shelf. And that’s what needs to happen. It can’t survive in today’s world.”

Gural suggests that while the racino industry is doing OK in and of itself, the racing side of it is beleaguered and won’t be able to justify receiving the subsidies much longer.

“The horse-racing component is in trouble because there’s been no evidence whatsoever that the increase in purses (from the subsidies) has caused an increase in customers coming to the racetracks and betting on the product,” he says. “If you look at the numbers, for the most part there’s been no growth in the handle whatsoever. That’s disappointing.”

Total combined on- and off-track handle on horse racing in the U.S. peaked at $15.2 billion in 2003 before falling to $10.9 billion in 2012—where it has roughly hovered ever since, according to data compiled by the Jockey Club.


Slots Not the Savior

The process of pairing racing with casino games first began in the 1990s, when racetracks around the country coped with declines in wagering by looking to slot machines as a silver bullet. The thought was that slots could provide a profitable new revenue stream, bring in new customers and subsidize the high operating costs of running races.

State legislators in numerous states eager to preserve the racing industry and its associated tax revenues were keen to the idea.

“The whole idea was, ‘We’re going bring it to a horse racetrack because there’s already gambling going on there, and it’s not really an expansion of gambling if we’re bringing more gambling to a place where there’s already gambling,’” says Ray Paulick, publisher of the Paulick Report, an industry newsletter.

For many, the transition from racetrack to racino was a lucrative one.

Sutor says that introducing slots in the mid-1990s and eventually table games saved Dover Downs.

In the pre-slots era, the property’s overall annual purse payout—the amount paid out to horse owners—averaged $600,000. “You’re talking peanuts. It was nothing.”

Within a couple years, Sutor had grown his annual purse size to $28 million and Dover Downs became one of the highest-performing racetracks in the country in terms of wagering handle. “We went from last in the U.S. out of the 38 tracks up to No. 2 behind the Meadowlands,” he says. “We had some of the best horse racing on the entire East Coast.”

The boost from adding casino games and the subsidies helped to offset the diminishing racing performance, but it never proved to be an elixir that could fully compensate for lower racing handle.

“To a degree it kept the industry alive, but it did nothing to further interest in that activity,” says Adkins. “It’s not a matter of marketing, because everybody has tried to market and remarket and remake parimutuel wagering—it doesn’t work.”

In Sutor’s case, the uplift from slots and table games proved to be a windfall until neighboring states unleashed an onslaught of competition in the mid-2000s, leaving Dover Downs teetering on the brink.

“When Maryland Live! opened, they creamed us. We had a 25 percent reduction in our revenues,” he says.


What About Greyhounds?

Despite horse racing’s decline, it still retains enough cultural cachet to remain relevant to the public, even if it’s just for one month of the year during Triple Crown season.

“I don’t see horse racing going away in my lifetime or ever,” says Sutor. “I see the big races still being around, but the smaller racetracks less so.”

Greyhound racing, which exists in Florida and a handful of smaller states, possesses even less cultural appeal and has experienced a far more precipitous decline. According to Grey2K USA, a group pushing for the discontinuation of greyhound racing, total handle from the activity in 2014 was $580 million—down from $3.5 billion in 1991.

“There’s no interest in greyhound racing. None,” says Adkins. “I have a 4,400-seat grandstand, and I’m lucky if I have 40 people out there, and most of them are the dog owners and kennel owners themselves.

“And it’s not marketing, because every greyhound track in the country is failing,” he continues, adding that the situation isn’t much different at his property in Charleston, West Virginia. “We are still forced under law to run dogs. There is no interest there beyond the people in that industry to wager on dogs.”

The decline of greyhound racing has also been propelled by fierce opposition from animal welfare groups, a dynamic that is less present in horse racing.

“It’s fascinating that the horse racing industry is not undergoing a decline that is as severe as what the greyhound industry is seeing,” says Carey Theil, executive director of Grey2K USA. “One of the reasons is that horse racing has been willing to address some of these welfare issues and challenges. The greyhound industry has been completely resistant to any change whatsoever.”


Decouple Your Way Out?

Many operators argue that the only way forward to ensuring the long-term health of racinos is to get them out of the racing business altogether. One way to achieve this end is to allow them to “decouple,” or separate their slot license from their parimutuel license and thus allow a casino to be operated without a racetrack.

States like Iowa, Rhode Island and West Virginia have either passed or on are on the brink of passing decoupling legislation. But the epicenter of the decoupling debate now is Florida, where all of the state’s dog and horse tracks—with the exception of Gulfstream Park—are in favor of decoupling.

“Gulfstream Park wants to continue thoroughbred racing, but that’s because they’re owned by a family that wants to continue thoroughbred racing. All of the other racinos in Florida are in favor of decoupling because they make so much money on their slots and they don’t make money with live racing,” says Paulick.

Proponents of decoupling say they have secured the necessary votes in the Florida legislature.

“We have the votes in the House and Senate for decoupling; we have had it for years,” says Theil. “The challenge is that there is a desire on behalf of the legislature’s leadership in Florida to not address this issue by itself but address gambling issues as comprehensive piece of legislation.”

A comprehensive gambling bill hit an impasse earlier this year, but there are indications that there will be momentum for passage in 2018.

Many horsemen’s groups understandably view the potential passage of decoupling in Florida as a grave threat to their industry nationwide, but Paulick reckons that the bigger threat is one of politicians simply diverting the racing subsidies toward other uses.

“What’s more likely taking place in other states is that the politicians are looking at the amount of money that’s going from slot machines to support the racing industry and saying, ‘Gee, we can’t pay our teachers enough money and we don’t have money to build hospitals, but we’re giving all this money to the racing industry. Let’s take some of this money away from the racing industry and use it for things we think are more important,’” he says. “That’s starting to happen in some of these states a little bit at a time, and it’s probably going to happen more and more.”

Even for proponents, the option to decouple is more of a necessary evil than a comprehensive solution, as it would allow for a gradual rationalization of the industry that would be much less painful than an outright implosion.

Sutor says having the option to decouple would help to ease Dover Downs’ current woes, though he believes it’s unlikely much of the subsidy money would ultimately end up back in his hands. “To assume that money would go to the casino is not a good assumption, but if we can stop losing money running these 10-12 races a night, that helps us.”

“Decoupling is something that’s going to be an absolute necessity, and it’s going to happen whether people like it or not. If it just collapses then you have a catastrophic problem,” says Adkins, emphasizing that the alternative to decoupling will be more bizarre instances of operators gaming the system.

“You have archaic laws that say, ‘OK, you have nobody in your grandstand, but you still have to run dogs.’ What do you have happen then? Then you end up looking at the loopholes like barrel racing, and then I take three Chihuahuas and I run them a 40-foot sprint down the track and say that’s a race.”