By Dan Ross
Recently, TDN published a data set illustrating how the racing industry in California has undergone a dramatic shapeshift, both before and during the pandemic. New betting patterns have constituted a quarter-billion-dollar boon for the advance deposit wagering (ADW) industry at the expense of the California horsemen's purses.
In a nutshell, as compared to a comparable period in 2018, the number of races this year has declined 30%. Although the overall handle has declined 18.8%, purses have dropped more than 26%.
To discuss these findings, we spoke with Thoroughbred Owners of California (TOC) president and CEO Greg Avioli. Prior to joining TOC, Avioli served as president and CEO of The Stronach Group (TSG) and of Breeders' Cup Limited. Prior to that, Avioli was the National Thoroughbred Racing Association (NTRA)'s COO and general counsel, and is the founding president of the organization's political action committee.
The following Q&A is from a longer, more discursive conversation. Any edits have been done in such a way as to streamline extraneous portions. The remaining text has been edited only very lightly for clarity.
DR: What are your main takeaways from the data?
GA: We've seen a fundamental shift in the economics of the industry in California.
DR: What are the most noteworthy changes you see?
GA: I think it jumps off the page at you: For the projections for the whole year, you're looking at purses generated in California, excluding Breeders' Cup, dropping from about [$87] million in 2018 to around [$64] million in 2020. That's a [near] 30% decline.
I do not expect to see the on-track generated purse levels or the OTB-network generated levels come back to where they were pre-COVID. I believe this now has some permanence to it.
DR: During the initial months of the pandemic, racing was pretty much the only betting game in town. Has the reintroduction of other sports into the marketplace impacted handle on racing?
GA: Of course. If you just look at Golden Gate as an example, during the early days when Golden Gate was one of the few tracks running, they had record handle for them–as much as $4 to $5 million a day. Now that you have the return of most of the other major sports, it has returned to its traditional $1- to $2-million-a-day range. That's the case, order of magnitude, with all of racing.
More recently, it was a bit of a shock to folks within the industry to see the [roughly] 50% reduction in total handle for both the Derby and the Preakness. If those had been run earlier in the year during COVID, I expect those declines wouldn't have been so great.
The advent of sports wagering in the major population markets of New Jersey, Pennsylvania and Illinois, coupled with the return of live sports, has definitely resulted in a decrease in the overall rate of ADW handle. But [ADWs are] still going to have a fantastic year.
DR: How do we fix the hit to purses, though? As Pat Cummings of the Thoroughbred Idea Foundation (TIF) has said, the splits on betting need to be reviewed. At the same time, he warns that a takeout hike would only “hasten racing's handle decline.” Do you agree with him?
GA: I believe that both need to be reviewed. I don't agree that you cannot review takeout in the context of looking at everything else. When you're looking at almost [30%] reduction in purse generation in the largest racing market in California over 48 months, you owe it to my constituents, the owners, to look at “X.”
The whole point of this economic model is that it was derived 20 years ago for ADW. There's no question it's had its benefits for California. It's also been extremely lucrative for the operators. So, we're just looking at: What is the model that is sustainable going forward?
One thing the folks who operate the major ADWs in the state–TVG and TwinSpires and Xpressbet–these are business people, right? They understand business numbers. None of this is personal. Right? If we went to the ADWs and said, 'Guys, we're off [30%] of our revenues–of our income–essentially for two years, we need to change the model.' Of course, everyone has to look at the model.
DR: This period has proven to be a windfall for the ADW companies like TwinSpires and Xpressbet who, at the same time, have seen operating expenses at their tracks slashed due to the reduction in racing. The TIF calculated that Churchill Downs' online wagering profits rose 39% in the second quarter of this year, even without the Derby. How does this dynamic factor into things moving forward?
GA: Which dynamic are you referring to?
DR: Where's the short-term financial incentive for companies like The Stronach Group (which owns Xpressbet) to bring patrons and bettors back to their brick-and-mortar facilities?
GA: I think that there are significant reasons. Look at Del Mar, for example. They have one of the most robust food and beverage operations in the whole country when it comes to racing. On-track wagering is the most lucrative form of wagering–of course you have incentives to bring fans back to your facilities.
The Stronach Group makes more money on a dollar wagered at Santa Anita than they do bet on Xpressbet. So, I disagree with that premise.
If your question is: How do we address the reality that Churchill Downs as a racetrack owns an ADW, as does The Stronach Group? I'm really not as focused on Churchill Downs as [I am on] The Stronach Group because they own two of the largest tracks in California.
DR: But that's a different dynamic than Del Mar, though. Del Mar doesn't own an ADW-The Stronach Group does.
GA: Correct. I'm not privy to–they're a private company–all the books and records of The Stronach Group, but I know for a certainty that that entity is significantly better off if people are wagering at that racetrack–particularly at California where they have a relatively minor market share for ADW. I'd say [almost] 80% of [ADW wagering] in California is TwinSpires and TVG.
DR: So, where are you looking to make fixes?
GA: If you go back to what I said about purse generation projected about $85 million this year, what is coming out of that? There are two sides to the equation. One is how can we reduce expenses that are paid out of the purse account right now so it can go back to purses, right? And big expenses that we have right now for that would be the CHRB [California Horse Racing Board], whose budget will be over $18 million this year, with $9 million coming from purses.
That's a budget that has increased on its own by 50% over the last five years from somewhere around $12 million. Even though the number of horses, the number of races, number of owners, number of trainers, everything that they regulate has declined 10 to 30%, their budget has gone up 50%.
We've made it very clear to them–to the board members and the legislators–that's not good government. We need to work on that. There is some funding in the recent bill that's just passed–the animal welfare bill in Sacramento [AB 1974]–that will allow some of the [state revenues from racing licensing and fines] that previously went to the general fund, to go to fund expenses at UC Davis that were previously paid for by the CHRB. So, it's a first step in a long journey, but that's about [$1.2] million a year that will unburden the horse industry right now.
We have the stabling and vanning fund that will be operating at almost a [$3.7]-million deficit this year, because it is primarily funded from wagering at the OTBs and the satellites, which have been largely dormant. We cannot continue to pay $5 million a year out of the purse account for stabling and vanning, particularly when we are funding a capacity of stalls of approximately 3,200 while dealing with horses in those stalls of approximately 2,400. We've got to restructure that program.
We have taken significant steps in the last 12 months to shore up and improve the safety of the backside for live racing and training, so that we can stabilize if not reduce the cost of workers' compensation, which is another multi-million-dollar hit to the purse account.
We're doing the things we can do on the big picture numbers and the expense side. Obviously, the way to grow a successful business is, long-term, not to cut costs but to increase revenues. So, on the revenue side, first and foremost, and this is a longer-term effort, but we have to increase our field size.
You've seen the decrease in the number of days of racing, and now that we are down to three days of racing [a week], we have to have stronger field sizes for those three days. And that's a topic of conversation for another day: How do you go about doing that? But the days of providing free year-round training, and yet having horses participate as the trainer chooses without regard to the broader economics, that can't continue.
DR: You mean there might be some kind of stabling fee imposed?
GA: One way or another, we have to come up with a shared vision between the racetracks and the trainers in order for the business to survive. There has to be a minimum number of horses participating on a regular basis in the state. Right now, we're much more old school, where everyone does their own thing. I run when I feel as though my horse is ready to run–can't rush them. If in fact I have a couple horses in training for a year that don't make a start, but the industry is paying for [them], that's a challenge to my business. That kind of stuff probably has to be addressed.
DR: That's a tricky thing to address though. All we've got to do is look back at the Santa Anita welfare crisis–that was a big concern, trainers being compelled to run.
GA: There's a big difference between a heavy handed–“you run or you're gone”–and an educational process where everybody starts nodding their head and going, 'I never realized.' And if we collectively don't do “X,” we're not going to make it.
DR: At the end of the day, it's the horsemen who are being crushed by the purse retention rates with ADWs. What should they be doing right now?
GA: The first is philosophical–we're an ecosystem. There's no way to significantly improve California racing as an industry and as a product if it's not done together. Almost any party can block something. If the horsemen go to Sacramento and they want something and the tracks don't, it's not going to happen. Vice versa.
We have got to get leaders to emerge from all segments who can say, 'What can we all do together?' And really take the time to understand the complex economics. What can we do to fix this? Until there's a commitment to work together and realize that things are going to have to change–already have changed–then we're just wasting a lot of energy trying to convince people of your idea.
DR: The ADW contracts expire at the end of the year. What's the status of the negotiations?
GA: The way the ADWs work in California is another most remarkably Byzantium deal that legislators set up in 2000. All those licenses are set to expire by December 31st. So, the requirement for accepting wagers after your license is granted is that you have to have what is known as a hub agreement with one of the following parties: either the TOC or with a Thoroughbred racetrack running at least five weeks. That would be Santa Anita, Golden Gate, Los Alamitos, [Del Mar].
There's a statutory cap on the amount that [an ADW provider can receive from an ADW wager made by a California resident, which is 6.5%]. All the ADWs can go to The Stronach Group, Del Mar, Los Alamitos. If they go to one of the racetracks and they work out an agreement with them, it comes back to the TOC to approve it, and the only thing we can approve or disapprove under the law is the rate. And if we think the rate is inappropriate, we can propose a different rate. And if that rate isn't agreed to, then there is a very short specific arbitration process.
DR: Have you made any projections on what those rates should be?
GA: You can do the math. ADW [handle] is going to be $800 million in California this year, and every point of fee paid to the ADWs is $8 million. So, add a 5% fee which has been a standard rate for the last decade out here on the larger ADWs, that is $40 million that they're getting in terms of post revenues–out of ADW–that would otherwise be going to the purses and commissions. If there was 4%, then it would be $32 million. Three percent, $24 million. We have not determined what an appropriate rate is–all this is happening in real time right now with us analyzing these numbers [and making] projections into the future.