(Continued from “Why Horse Racing Declined,” Horse Racing Business, March 21, 2009.)

Andrew Grove, chairman emeritus of Intel, explains the term strategic inflection point:

… a strategic inflection point is a time in the life of a business when its fundamentals are about to change. That change can mean an opportunity to rise to new heights. But it may just as likely signal the beginning of the end. Strategic inflection points can be caused by technological change but they are more than technological change. They can be caused by competitors but they are more than just competition. They are full-scale changes in the way business is conducted, so that simply adopting new technology or fighting the competition as you used to may be insufficient. They build up force so insidiously that you may have a hard time even putting a finger on what has changed, yet you know that something has. Let’s not mince words: A strategic inflection point can be deadly when unattended to. Companies that begin a decline as a result of its changes rarely recover their previous greatness. But strategic inflection points do not always lead to disaster. When the way business is being conducted changes, it creates opportunities for players who are adept at operating in the new way. This can apply to newcomers or to incumbents, for whom a strategic inflection point may mean an opportunity for a new period of growth. You can be the subject of a strategic inflection point but you can also be the cause of one.

Horse racing in the United States is either at an inflection point or on the downside of one, all but certainly the latter. The sport could plug along for a while with sustenance from a loyal but aging core of fans–and in some places from alternative forms of gaming–but wither away. On the other hand, with the right business models, horse racing could solidify itself as the 21st century progresses, even though a return to its previous greatness is unachievable.  Which scenario eventuates will ultimately determine the fate of the entire bloodstock business because wagering handle is ultimately the economic raison d’être for all else.

The most likely scenario is that racetracks offering an attractive value proposition will do well and vanilla tracks without one will perish. Another way to say this is that only racetracks with a distinctive business model will survive.

In the racing press and at racing conferences, there are often comments that racing needs a new business model. When you examine what is being said, most of the time the term business model is intended to mean a profit model. A business model is broader and encompasses a customer value proposition, a profit formula, strategies, and the human resources and processes that deliver value to customers.

A recent Harvard Business Review article titled “Reinventing Your Business Model” did an exceptional job of explaining the term, which consists of several interacting parts or elements.

First, a business model starts with a customer value proposition…or what benefits customers in the target market are getting out of consuming the product or service. Put differently, what need and/or want is being satisfied. Why does one prefer to go to a racetrack rather than bet online-and vice versa? Clearly, these are different value propositions.

Second, a business model contains a profit formula, which, in turn, consists of a revenue model, a cost structure, and a margin model. Racing has multiple profit formulas, depending, for instance, on whether wagers are made on track or off track and on whether a wager is a straight win, place, show bet as opposed to an exotic bet. Further differences depend on whether an at-the-track wager is made on a live race or a simulcast race and whether the person who bets through an advance deposit wagering service lives within a certain distance of a racetrack.

Third, a business model encompasses key resources “needed to deliver the customer value proposition” and the key processes that “make the profitable delivery of the customer value proposition repeatable and scalable.” In the case of racing, key processes and resources are, for example, information and communications technologies and the skilled professionals in charge of them.

Following are some business models that have proved to be successful in horse racing:

Del Mar, Keeneland, Saratoga, and to some degree Oaklawn and Monmouth are racetracks with a high probability of ongoing profitability because they have well-defined and proven business models, and in particular attractive customer value propositions. These are boutique lifestyle racetracks that have short meets and a pleasant on-track ambience. The high quality of racing contributes to the profit model by enticing off-track wagering.

Churchill Downs Inc. has at least two business models that sustain it. The first one is built around the customer value proposition and the profit formulas associated with its signature event, the Kentucky Derby, which is a single weekend per year. The other Churchill Downs Inc. business model is based on year-round racing from its four racetracks and from alternative gaming.

Mountaineer Casino Racetrack and Resort, Philadelphia Park, Indiana Downs, and others, offer a racino business model. So far, this is a successful approach utilizing a different customer value proposition with a different profit formula. This inherent risk, of course, is that state governments may decide to forgo subsidizing horse racing with gaming income.

Another useful business model is employed by racetracks that have essentially opted to be television studios for the purpose of sending out signals to off-track sites. These racetracks have live racing at odd hours and often on Tuesdays to fill out simulcast schedules during these slow times. They usually try to avoid head-to-head competition with more popular racetracks. Their strategy is to “be where they aren’t” and to provide a low-cost commodity signal to gamblers.

The European and Asian racetracks also differ in terms of customer value propositions, but, unlike most racetracks in the United States, they prefer short meets. Whether the European and/or Asian customer value propositions could be successfully transplanted to the United States is unanswered, but might be experimented with to see. Keeneland has two short meets per year and does spendidly.

Each racetrack must carve out its own business model, built around its particular external environment and internal strengths, in order to continue on in business. In other words, racing does not have a business model per se, but rather, it has business models, just as Wal-Mart, Nordstrom, Target, etc. have their own templates that made them outstanding. The profit formula is similar across racetracks, whereas customer value propositions are very different. Importantly, it is a fallacy to think that a business model that works well in one venue can be cloned in another location and the results will be the same.

Examples are easy to find of racetracks that do not have a clearly-articulated business model formulated around an attractive customer value proposition. Such tracks with a generic approach will likely vanish. In addition, a few racetracks have a winning business model, but they are too valuable as real estate plays to survive as racetracks.

Forecasting and predicting are always risky propositions because the future is unknowable. With this disclaimer, if present trends can be extrapolated, the most likely outcome for horse racing in the United States is a downsizing–just how severe is indeterminate.

Based on the assumption that more racetracks will be closing than opening in the United States, there will be fewer racetracks: marginal racetracks without a compelling customer value proposition won’t be able to survive. Ohio, for instance, with seven racetracks will surely have attrition and, likewise, California and Kentucky have tracks on the bubble.

This rationalization should translate into a reduced bloodstock component. The market for well-bred racing prospects with good conformation should remain strong, but, as the shakeout in racetracks occurs, demand for pedestrian racing stock will probably see a precipitous decline, as the law of supply and demand works. A beneficial offshoot would be fewer unwanted horses.

While the number of racetracks and the bloodstock industry in the United States should shrink, total betting handle and purse averages may actually increase because of remote wagering on the surviving North American racetracks, as well as  on international signals. In my view, the racing industry in the United States will be considerably smaller as the 21st century progresses but will have a more solid economic foundation than it does today. 

Next week’s (April 4, 2009) article “Crafting and Tailoring Racetrack Customer Value Propositions” explores this all-important subject in more depth and looks at such issues as positioning racing as a sport or gambling, customer service, horse slaughter, breakdowns, medication, and handle takeout. It is the third and final article in the Horse Racing Business series of March 21, March 28, and April 4, 2009.

Copyright © 2009 Horse Racing Business.


“Yesterday’s Winner is a Loser Today”

                            Ernest Tubb

Whether or not you agree with the Federal-government bailout of Chrysler and General Motors is a personal preference, mostly depending on your ideology.  But anyone would concur that the elected officials in Michigan, Democrat and Republican alike, and the business community fiercely rallied behind the Wolverine State’s signature industry and spoke with a unified voice.  This “golden goose” was not about to go bankrupt if they could prevent it.

In Kentucky, the industry comparable to automobile manufacturing in Michigan is, of course,  the breeding, selling, and racing of horses, which directly and indirectly employs thousands of citizens, attracts significant out-of-state and foreign investment, promotes tourism, and undeniably contributes plenty of state and local tax revenues.

Yet all is not well, not by any means.   The racing industry does not need a bailout, but it does require a chance to compete on a more level playing field with casinos.

Churchill Downs, Ellis Park, and Turfway Park are fighting for their economic lives–with one hand figuratively tied behind their backs–against nearby Indiana casinos.   Even were Kentucky to legalize video lottery terminals, the tracks would still be disadvantaged because the Hoosier-state casinos offer both slot machines and table games.

Currently, Thoroughbred trainers in Kentucky often send their horses to Mountaineer Casino and Racetrack in Chester, West Virginia and Presque Isle Downs in Erie, Pennsylvania, as well as to other racing venues where purses are supplemented by alternative gaming.

Presumably, as in Michigan, elected officials in Kentucky–from both political parties–and business interests would have put aside their differences and unified to do everything possible to rectify the situation that imperils Kentucky’s version of the golden goose and thereby affects so many people, present and future.   As rational as this supposition may be, it is false.

Defying common sense and the economic enhancement of his State, the most recent former governor, Ernie Fletcher, a Republican from Lexington, the heart of the Bluegrass region itself, never tried to take the bold actions that would conserve and strengthen Kentucky’s vital horse-racing enterprise.  Enter the present governor, Steve Beshear, a Democrat, who defeated a field of contenders in his party’s primary by focusing essentially on one issue–installation of racetrack casinos.   He won and then handily defeated Fletcher in the general election, again with a laser-like focus on racetrack casinos.

Once in office, Beshear promptly proved to be powerless to get the bi-cameral legislature, with one house overwhelmingly controlled by his own party, to pass the enabling legislation to allow the voters of Kentucky to decide whether to amend the constitution to permit racetrack casinos.   The new speaker of the Kentucky House of Representatives, elected on January 6, 2009, is much friendlier to racing than the individual he replaced.   Inexplicably, however, Beshear has indicated that he does not intend to revisit the racetrack casino issue in 2009 and the president of the Senate remains adamantly opposed to expanded gaming, so prospects don’t look bright in River City and the Commonwealth.

Gambling is usually debated along cultural, religious, and moral lines.   The view here is that the alternative gaming question for Kentucky is in fact really one of long-range economic development on which the Commonwealth’s fate heavily depends in the decades ahead.  To be specific, alternative gaming is not itself the focal point for economic development, but rather, is a means to an end:   generating some of the capital to expand and diversify the Kentucky economy of tomorrow.

Industries, like people and products, have life cycles.   

Pittsburgh, for example, was and still is known as the “Steel City.”   Its famous football team is appropriately named “the Steelers” and its “Steel City Beer” is another namesake.  But the Pittsburgh-area economy is no longer dependent on steel, as it has made a bumpy transition after steelmaking moved offshore and to mini-mills.  

Another illustration: Dubai is diversifying at a frenetic pace in response to peak oil, although it has encountered some problems of late stemming from the credit crunch.

Leaders of cities, states, regions, and countries who are farsighted and want to provide for future generations, begin to broaden their economies before they are forced to do so.  It is nearly a certainty that today’s most prominent industries will be eclipsed someday.

Kentucky’s key industries traditionally have been bourbon, tobacco, coal, and horse racing/breeding.  Bourbon and tobacco are in decline, owing to the lifestyles of contemporary consumers and to unfriendly government policies.   Coal is still in strong demand, but is most likely living on borrowed time.  President-elect Obama is on record as being hostile to coal and his choice for Secretary of Energy, Nobel Prize-winning physicist Steven Chu, said that new coal-burning power plants are his “worst nightmare.”   Lastly, horse racing is in decline in Kentucky and nationally.

Reliance on these industries and the status quo does not bode well for Kentucky.    It is already a poor state that ranks low on the most important factor that it takes to compete in an increasingly global high-tech society: quality education.   (My family has deep roots in Eastern Kentucky and I have visited there often and have seen up close the poverty and the extremely limited resources that dedicated teachers have to work with.  Kentucky’s Fifth Congressional District has the shortest life expectancy in the United States.)  Further, national ratings of private and public institutions of higher education do not have any Kentucky university remotely proximate to the top echelon on the criterion of scientific research output.

Where must the money come from to mitigate this unfortunate and ongoing situation, if at all?   The answer is evident:   mostly from the tax revenues that Kentucky collects from its mature industries of the present, the cash cows,  and uses to educate and train its citizens in the skills appropriate to a high-tech, knowledge-based economy.

Thus it is difficult to fathom why elected officials would not do everything in their power to buoy the State’s current signature industry in order to gain more tax revenues for a longer period of time to foster economic development of nascent industries and companies.  Oddly, a democratically-elected body of legislators has persisted in denying their own constituents the free choice to decide for themselves, in a plebiscite, the fate of racetrack casinos. 

Kentucky’s bloodstock and racing enterprises need to be bolstered by allowing racetrack casinos, if, for no other reason, than for the economic vitality of the Commonwealth long after present-day elected officials are history.   Instead, the State’s restrictive laws on racetrack offerings have the unintended effect of promoting economic development in Indiana, West Virginia, and other rival venues, because countless Kentucky residents go there to eat, drink, gamble and stay overnight.

Contemplate a gloomy but plausible scenario for Kentucky, circa 2059:

The Commonwealth of Kentucky is about like it always has been in the economic pecking order among the states, muddling along in the lower ranks and never having found large-scale industries to replace coal, bourbon, tobacco, and horse racing.  This failure kept the State from making the investments in education, infrastructure, and business incentives necessary to compete effectively in the mid-21st century.

The Bluegrass of 50 years ago is mostly a memory.  Many of the farm owners tried to save their land from development, but the population growth ultimately swamped their efforts and the price of real estate and the faltering bloodstock business made it prohibitive for agricultural use.   Calumet Farm is now a residential development, Calumet Farm Estates, complete with white fences and the old red entrance gate.  The single remaining barn is a community center for subdivision residents.   The Kentucky Horse Park shows visitors a short movie depicting what the Lexington area looked like when it was blanketed by horse farms.  Churchill Downs and Keeneland are still in business, as shadows of their former selves, whereas the rest of the State’s racetracks are gone.   Most of the secondary and tertiary suppliers to the racehorse industry–veterinary clinics, feed vendors, bloodstock agencies, advertising agencies, and the like–have downsized or vanished.

After years of sleeping while the horse-racing industry plummeted, legislators finally came to and rose above personal agendas and politics.  The racetracks got alternative gaming, but it was too little too late.  By the time racetracks were permitted to install slots, the machines’ popularity had run its course.  Generations raised with far more challenging interactive electronic devices and 3-D Internet found the machines boring.

Indeed, no one knew it at the time, but the slot machines of 2009 would be passé in 10-15 years.  Web 3.0 was just beginning to emerge and it would be revolutionary.  With 3-D Internet, for example, a husband can try on a suit at a clothing retailer, look in a store mirror, and have his wife at work or home comment on the appearance.  Web 3.0 allows a poker player to be in his family room in Des Moines, Iowa, and occupy a virtual seat at a table in the poker room at a casino in Las Vegas, where he plays with electronic cards.  There is no distinction between betting at a racetrack and wagering from elsewhere, as everyone uses a mobile device. 

Governments long ago gave up the impossible task of trying to stop gaming within their borders and instead decided to regulate and tax it.

Looking back, people of 2059 are amused and perplexed when they learn about how controversial slot machines were to the Kentucky legislature of 2009.  Compared to today’s technologies, slot machines were pretty tame stuff.   However, a University of Kentucky history professor put the moral argument that took place over alternative gaming into perspective.  She told of how the Viennese waltz was scandalous when it was introduced, the product of lower class society and gin mills, because the man and woman held each other ‘sinfully’ close while dancing.   She said that about 100 years ago, an entertainment icon named Elvis Presley appeared on the top-rated television program of its day, the Ed Sullivan Show.   Presley’s hip-swiveling gyrations while singing were so ‘vulgar,’  many complained, that Sullivan ordered his camera crew not to take pictures of Presley below the waist.  

People are heard to lament, even now, how much better shape Kentucky would be in economically if the horse-racing industry would have been sustained earlier and longer by slot machines.  At least the machines would have filled tax coffers for awhile and provided some of the wherewithal for investing in the future of Kentucky.

The horse was out of the barn [pun intended] when elected politicians seriously endeavored to save the racing and breeding industry.

The January 31st edition of Horse Racing Business constructs a brighter future for the Commonwealth in When Kentucky Awoke and sketches how the horse-racing industry can be used as an economic lever to achieve it.

Copyright 2009 by Horse Racing Business.

Coming Attractions

January 31:  When Kentucky Awoke

February 14:   Racing’s Misguided Muhammad Ali Philosophy of Publicity

 February 28:   Churchill – Down or Up?