Chris E. Wittstruck, Esq.

Amidst the current swirling controversy over breakdowns, steroids and synthetic surfaces lurks a racing topic the mainstream media barely addresses.  From the perspective of our sport’s survival, it is a subject matter as important as inbreeding, drugging and other highly exposed issues. Over the course of the last few years, some Thoroughbred industry news outlets have chronicled the ongoing range war precipitated by the proliferation of Advance Deposit Wagering (ADW) entities. The internal industry battles waged are as much of a threat to racing as any scandal one could conjure. While periodic truces and treaties have served to avert full-blown catastrophe, the danger of such a calamity remains clear and present. To comprehend what’s going on and why requires an understanding of the financial model that underpins our industry. 

Basic principles of economics tell us that the optimal price for any product is the one acceptable to both buyer and seller. That’s a pretty straightforward concept if the product is a pair of shoes. In our industry, however, application of this premise first entails identification of the unique nature of our product, and just who the sellers and buyers are. In our business, the main product is the licensing of real-time distribution of the depiction of harness racing via broadcasting, known as a simulcast signal. Ironically, the signal lacks any significant intrinsic value. Its worth is rooted in the fact that it is one of the few generated sports products upon which wagering is almost universally legal. The more appealing a certain product is as a betting proposition, the more that signal is sought and, presumably, the higher price the market for it will bear.

While the producers of the product at any given venue are the horsemen and the racetrack, the racetrack ultimately owns the product. The horsemen receive financial benefit from its distribution in the form of funding of purses and are afforded certain legal protections in some instances regarding distribution of the signal without their consent. The racetracks are the sellers of the product. The traditional buyers are other racetracks, casinos and off-track wagering outlets. Of course, the larger a signal’s distribution, the more potential exists for wagering on the specific racing it depicts; hence the pricier the product. Thus, it is incumbent on the selling racetracks to obtain the widest possible distribution for a product, so as to receive the maximum return possible for its delivery.

To achieve greater distribution, a racetrack can also sell its signal to a media distributor or television network, on either an exclusive or non-exclusive basis. That distributor often acts as its own off-track wagering service by offering betting over the internet or via telephone for the products it purchases through Advance Deposit Wagering (ADW). Additionally, a racetrack or racetrack group might attempt to set up a subsidiary distribution network and its own ADW service, thus taking full advantage of its product by cutting out the middlemen between the racetrack and its geographically distant bettors. Moreover, purchasers of signals may band together for the purpose of negotiating a better price from a seller for its product. Finally, various horsemen’s groups may also form joint negotiating teams to ensure that they receive a greater amount towards purses by refusing to consent to certain signal sales at the racetracks where they produce products.

As confusing as some of this may all seem, it’s not too hard to conclude that several competing interests are at work. Consider as examples some of the feuds presently taking place in Florida and Kentucky.

Magna Entertainment Corp., owner of Gulfstream Park and Churchill Downs Inc., owner of Calder Race Course, formed a simulcast content distribution consortium called TrackNet Media Group. TrackNet is not an ADW service. Magna and Churchill maintain their own ADW services; XpressBet.com and TwinSpires.com respectively. Towards the end of 2007, the Florida Thoroughbred horsemen (FHBPA) were refusing to consent to the export of the Gulfstream signals out of the state, as is their right pursuant to the Federal Interstate Horseracing Act of 1978. The FHBPA, part of a newly formed negotiating entity known as the Thoroughbred Horsemen’s Group (THG) were upset at what they considered an extremely poor pricing model for the signal. THG believes that revenue from wagering should be equally split among the tracks, the horsemen and the ADW handling the wager. Eventually, the FHBPA and TrackNet struck a deal regarding signal pricing, distribution and revenue allocation, though not in line with the THG proposed 3-way split; but that’s not the end of the story.

While the horsemen consented to interstate simulcasting, TrackNet refused to share signal content with independent ADWs Youbet.com and Television Games Network (TVG). Youbet.com had reportedly offered to come close to the THG’s 3-way split model. TrackNet, a company owned by both Magna and Churchill and thus intertwined with those tracks’ ADWs, XpressBet and TwinSpires, refuses to send its Gulfstream content to Youbet or TVG unless these independent ADWs agree to share with XpressBet and TwinSpires their exclusive signal content and wagering arrangements with other racetracks. The consequence of this quarrel is that the Gulfstream signal is not as widely distributed as it could be, resulting in a detriment to the horsemen, the independent ADWs, the bettors and, to at least a limited extent, Magna and Churchill.

The situation at Calder Race Course is just as worrisome. There, the FHBPA has refused to consent to interstate export of the simulcast signal by track owner Churchill Downs to any entity other than the New York City Off Track Betting Corp. On April 24, three days after the start of the Calder meet, Churchill Downs filed a federal lawsuit seeking the disbanding of THG, accusing the entity of violating the Sherman Antitrust Act. Ironically, Churchill is accusing the horsemen of illegally monopolizing the distribution of the Calder signal while its jointly held content distribution subsidiary, TrackNet, is refusing to share the Gulfstream signal with major ADWs.

Churchill Downs’ problems extend to its namesake track. Kentucky horsemen are also refusing to consent to interstate simulcast export. In response, Churchill has announced a 20% purse cut and, on May 14, amended its federal court antitrust complaint to list the Kentucky horsemen as additional defendants. On the evening before, a large contingent of Kentucky horsemen were urged by their negotiating team to stand strong against the racetrack corporation’s actions. Then, on May 23, the horsemen counterclaimed against Churchill, asserting that their agreement with the track mandates that wagers placed through ADWs be treated as if they were placed on-track. The horsemen’s legal interpretation of the contract aside, the owners and trainers are accusing track management of pushing Louisville-area bettors to the web and away from the track, allegedly to avoid funding of the purse account at the higher on-track percentage.

The signal pricing problems enveloping the industry do not always directly involve horsemen. In New York, where it is reported that roughly $1 out of every $5 bet in North America is wagered on its Thoroughbred product, the New York Racing Association (NYRA) opened the Belmont Spring meet on April 30 without distribution of its signal to dozens of racetracks across the country. Two separate racetrack consortiums, The Mid-Atlantic Cooperative and The Southern Racing Cooperative countered NYRA’s strong negotiating position regarding pricing of its lucrative signal product. NYRA, which maintains its own ADW, NYRA Rewards, was apparently willing to forego revenue from these several signal importers unless it received its demanded price. The Mid-Atlantic tracks were embroiled in a similar dispute in 2004 when NYRA switched exclusive “in-home broadcast” rights from the tracks to TVG. Luckily, NYRA reached agreement with The Mid-Atlantic Group on May 8, and with the Southern Group a week later. Mid-Atlantic Cooperative members include The Meadowlands Racetrack, Freehold Raceway, Mohegan Sun at Pocono Downs, Dover Downs, Harrington Raceway, Ocean Downs, Rosecroft Raceway and Rockingham Park. Northfield Park, Lebanon Downs, Hazel Park, Sports Creek Raceway and Northville Downs are among the member tracks comprising The Southern Racing Cooperative.

If there is a bright spot in all this, it can be found in the late December 2007 exchange agreement between TrackNet and NYRA, permitting each the right to accept wagers on their respective signals on a non-exclusive basis through their affiliated ADW services. The deal also allows TrackNet’s HRTV television system the non-exclusive right to broadcast NYRA races. This is in addition to NYRA’s non-exclusive agreement with TVG, previously its exclusive distribution and ADW partner.

Is non-exclusivity the solution? Partly. There is, however, still the issue of pricing the product and sharing income to ensure both profit and protection for all industry participants and stakeholders. Whether negotiating conglomerates of either tracks or horsemen’s associations are beneficial or detrimental, assuming they are in fact legal, is a question that will be answered over time. The more important question is this: How much time do we have left? If I have an account with ADW #1, but they can’t offer wagering on the signal from my favorite track, I am forced to either sign up with ADW #2, or find a simulcast center that has import rights to that signal. If I really like Calder or Churchill, however, I might not even be permitted to wager on their product at all without a plane trip to the Sunshine or Bluegrass state. If I operate a small harness track and the big guys want to charge a fortune for their signal, I might not be able to carry that popular product, thus frustrating my patrons, costing me much needed simulcast revenue and diminishing the horsemen’s purse structure. While fighting for their price, the big guys are curtailing signal distribution, costing both themselves and their horsemen revenue. Where this all will inevitably lead isn’t much of a secret: There’s always online poker!

Worse, none of this can be blamed on a few scoundrels with snake venom and a syringe or a big city reporter equating horse racing with animal abuse. This situation is a textbook study in self-flagellation. Every major and most minor industry stakeholder entities bear responsibility for this mess. A league “office” or “commissioner” wouldn’t legally be able to dictate fees and pricing in a free market. The solution must come via individual commitments to the idea that the greater good dictates compromise. I realize that’s tough, especially when there is imbalance in the bargaining power of the parties involved. I’ve been on both sides of those types of fights in and out of this industry. Still, when it all goes to pieces, nobody will have anything anyway. We, by far, aren’t the only game it town, and if our game isn’t on T.V., the Internet or at a local simulcast center, then it’s not even in town!

Chris E. Wittstruck, an attorney and Standardbred owner, is the founder and coordinator of the Racehorse Ownership Institute at Hofstra University, New York and a charter member of the Albany Law School Racing and Gaming Law Network.