Saturday, 26 July 2008
The sale is just one more in a growing trend for private equity purchases of media firms. Their interest in media companies stems from the fact that the market value of many does not reflect the underlying cash flows and asset values or the mid- to long-term prospects of the firms.
The valuation challenge of media occurs in good part because advertising expenditures are not evenly distributed throughout the year and because advertising revenue is significantly affected by fluctuations in the economy. These variations create significant disquiet among stock market investors because they make revenue, returns, and dividends less predictable in the short term.
These realities—combined with unproven beliefs of many investors that new media are displacing all mature media and making growth in their businesses impossible—reduce the valuation of media stocks and make media firms attractive to private equity firms that think about the businesses in terms other than quarterly performance.
Monday, 21 July 2008
The problem evidenced in the dispute between the FCC and Comcast over its traffic management policies blocking or slowing BitTorret and other files in violation of FCC network neutrality rules requiring open access. Without addressing whether regulators or Comcast are right in the dispute, it is clear from the company’s response that it has lost sight of it core business.
Comcast argues it was engaging in reasonable business practices by limiting the flow of BitTorrent files (often used to download large video, audio, and text files) because they push up the flow of traffic and slow the system. In Comcast’s view, the system and its integrity are its raison d’etre and represent the business it is in. It is easy to understand why the company and its executives might think so.
Comcast spends the majority of its effort and personnel creating and maintaining its system and infrastructure, tackling issues of system capacity and capabilities, and working to ensure system reliability and speed. It provides video, Internet, and voice services via 575,000 miles of wires serving 15 million cable subscribers, 13 million Internet users, and 4 million digital home providers. In the last three years Comcast has spent $13.6 billion in capital expenditures on the system.
Unfortunately, the extraordinary network it operates and maintains—the lines, switches, head-ins, Internet and telephone connections—are not the business of Comcast, they are just the requirements for conducting the business. Its real business is providing customers access to the video, audio, text, and voice communications they desire.
Its central purpose is serving the needs of the end users, including those who want to acquire capacity-eating BitTorrent files. It is the purpose that its executives seem to have forgotten when they decided their network management practices were more important than the wishes and desires of their customers. Their absent mindedness is not completely surprising, however, because the company has long had one of the poorest records of customer service among media firms. Lots of problems develop rapidly if you think it would be a good business if you just didn't have to deal with bothersome customers.
Thursday, 17 July 2008
The results were even worse for networks in the major acting categories: Only 1 of the five Emmy nominees for lead actor and 2 of the five for lead actress went to network programs.
Overall, 24 cable network programs received nominations and 7 cable channels received 10 or more nominations. HBO received 85 nominations—beating out all the broadcast networks, Showtime received 20 nominations, and AMC received 20 nominations.
Drama is a bellwether of the health of television programming and networks continue to fair poorly. It is a particularly important genre, socially and culturally, because it allows explorations of beliefs, attitudes, norms, aspirations, and fears better than other program types. However, success is unpredictable and good drama is expensive to produce. Historically it was the province of the well funded dominant networks, but that has now changed.
The decline of quality in network television programming is directly related to the increasing number of channels available in households. As the number of channels increases, the average number of viewers declines, producing declining advertising support, and thus reducing resources available for program investments. The responses of networks have been predictable. They offer more game shows and reality programs that are less expensive to produce, avoid productions that are edgy and innovative, and rerun programs as much as possible.
Network prime time filled with shows such as “I survived a Japanese Game Show”, “Wife Swap”, “Nashville Star,” and The Bachelorette” and the networks wonder why they have trouble capturing audiences and gaining financial resources. When they do provide drama it is all too often formulaic and a spin off from an already successful series. There are strong tendencies for network drama to have a criminal or legal practice oriented or take a prime time soap opera approach, such as “CSI”, “Law & Order”, “Desperate Housewives”, and “Grey’s Anatomy”.
The program challenge has been growing worse year after year since the development of cable television channels in the 1970s. I don’t want to be interpreted as saying the networks have produced no fine drama, but the amount has declined precipitously.
This raises the question of why cable channels are able to follow an opposite path, increasing their production of drama and gaining more acclaim for their work. The simple answer is money. Having additional sources of income other than advertising frees programs from the necessity of seeking audiences linked to interests of advertisers and from the content influence of advertisers. It allows producers, writers, and directors to employ greater creativity, to address controversial subjects, and to take the time to ensure quality in the production.
Subscriber-supported HBO has the longest and most distinguished record in producing original drama with highly rated and acclaimed series such as “The Sopranos”, “Angels in America”, “Six Feet Under”, “Deadwood”, “Band of Brothers”, and “Sex and the City”. HBO is premium channel financed by subscriptions from about one third of American households, a clear example that many viewers want and are willing to pay for innovative, quality programming.
In recent years there has also been significant growth of drama from cable channels receiving both subscriber and advertising revenue, thus giving us programming such as USA network’s “Monk” and TNT’s “The Closer”. Original television drama is now being produced by other channels, such as AMC, Lifetime, and Showtime, as well.
One of the side effects of the increased production of drama by cable channels is that they are now playing significant export roles and their programming is regularly appearing in prime time on national channels, especially public service channels, in Europe and elsewhere.
Network executives need to seriously reconsider their programming strategies, particularly where drama is concerned, or they risk become secondary channels in the years to come. Unless they find ways to develop and support quality drama, it will increasingly become the trophy programming of cable channels in the years to come.
Monday, 14 July 2008
In both cases, I'll be focusing on the New York racing scene, that is, as an owner or a trainer stabled at Aqueduct or Belmont, and making an annual pilgrimage to Saratoga. New York has the best purses around -- they'll average over $700,000 a day at the upcoming Saratoga meet -- but it also has very high expenses. So, even with the kind of horses that most of us are satisfied to have -- solid, hard-working thoroughbreds -- not a stakes horse, but not a $4,000 Finger Lakes claimer either -- it's not easy to come out ahead -- even when your horse starts, say, 10 times a year, which is the number of starts that most owners and trainers consider the optimum.
Let's begin with Owner Basics. A typical day rate -- what the trainer charges just to keep your horse in the stall, feed and exercise it -- is now about $90 at the NYRA tracks. (The big names, such as Pletcher, Mott, etc., charge much more.) Then there are the extras. An increasing number of trainers now charge a race-day fee -- say $100 -- to cover the costs of sending a groom to NYRA's detention barn with your horse. If your horse runs 10 times in a year, that's another $1,000. And these days it's becoming normal to see an additional item or two on the bill, for, say, "tack and supplies" or a separate charge for your pro-rata share of the trainer's workers' compensation premium. Let's say $150 a month per horse for those extras. So, before the horse wins any purse money, your bill from the trainer is on the order of $36,000 a year.
And the costs don't stop there. Don't forget the van bills up to Saratoga and back -- say at least $800 with current fuel costs. You'll need the farrier to come at least once a month, at $150 a pop, even without Ian MacKinlay's fancy glue-on horseshoes. And then there's the vet! It's impossible to predict what vet bills will be, but it's hard to get them under $300 a month in New York, and they can go MUCH higher. A little Bute, a little Winstrol or Adequan (at least until those steroids are banned), some joint injections, perhaps some acupuncture -- and that's just what New York vets use on a routine basis for horses who don't need anything special. So let's add another $6,000 a year for all those items.
Now we're at just about $43,000 for the year, before the horse has set foot on the track in the afternoon. How do we pay it? From the purses? Don't we wish. Even when the horse does finish in the money, the owner doesn't get all of it. First, the trainer gets 10% off the top. In addition, many trainers take another 1-3% for their barn help. The jockey gets 10% of the win purse, 5% of place and 7.5% of the show purse (don't ask; the numbers are mired in history). For losing mounts -- finishing fourth or worse -- we pay a jockey fee of a flat $100. And don't forget the $23 a start for the outrider pony and $20 for a lasix shot. Wait, there's more. In New York, the Jockey Club gets $2.50 a start. (New York is the only state where the Jockey Club still has a role in registering stable names and colors.) And the backstretch health program gets $12.50. The New York Thoroughbred Horsemen's Association gets 2% of the purse, most of which goes to backstretch benevolence programs and to support better drug testing. The backstretch pension fund for grooms and hot walkers gets 1%, and the Jockey Injury Compensation Fund, which provides insurance coverage for jockeys and exercise riders, gets 0.7%. (Click this link for a good description of how the JICF functions.) I don't begrudge any of that money; it's all for good causes. For some of them, I wish we could afford to pay a lot more. But it does eat into the bottom line.
So, let's say you win a $50,000 allowance. First, you haven't won $50,000; the win purse is only 60% of that. (From the purse, 20% goes to second place, 10% to third, 5% to fourth, 3% to fifth and the remaining the last 2% is split equally among the other starters.) So, as the winner, your share is already only $30,000, and it's going to end up even lower, because, after paying all the costs I've been describing here, not to mention the charges for the win pictures and the donuts for the barn, you are unlikely to take home more than 75% of that $30,000, or about $22,500. Not bad, but a lot less than it looks like if you just look at the gross earnings. (And don't even think about the consequences of finishing out of the money. If you finish worse than 5th, there's no way you won't lose money, especially once you've paid for the jockey, the outrider pony, the lasix, etc.)
And these numbers are for horses that are healthy, at the track and running regularly, which probably describes only a very small minority of race horses; most will need something extra most of the time. This overview doesn't cover the costs of the horses that get injured or a little out of sorts, so they can't run 10 times a year, or the ones that need $5,000 surgeries, and several months of recuperation, because they poked an eye on something in their stall (yes, that happened to one of ours last year). To say nothing of the ones that never make it to the track at all. (Only two-thirds of thoroughbreds actually start even one race, and only half of all thoroughbreds ever win a race.)
In 2006, the last year for which I have complete numbers, horses on the NYRA circuit made 18,371 starts in 2250 races (an average field size of just over 8), and earned gross purses of just over $113 million. (I'm grateful to NYRA and the New York Thoroughbred Horsemen's Association for supplying those statistics.) That was an average purse per race of a little over $50,000 (considerably skewed, of course, by the big stakes races). And it meant that the average earnings per start were $6,170. Looks like the average horse, if it ran 10 times, could just cover its expenses. So far, so good.
But, there are two problems with that analysis. First, the average earnings per start is vastly inflated by the high purses dedicated to stakes races. Second, most thoroughbreds don't, in fact, start 10 times a year. The national average is more like 7 starts a year, and there's no reason to think that New York is different.
So let's correct for the stakes bias. If we exclude races worth $100,000 and up, the number of starts drops to 17,336 (in 2107 races), but the gross purse amount drops to $83.5 million (or just under $40,000 per race). That means the average starter in a non-$100,000 race earned $4,816. Add one more correction, reflecting the fact that the average thoroughbred probably makes only seven starts, and that brings the expected gross earnings for a typical journeyman horse in New York to no more than $33,000 a year. That's a long way from covering the bills, which, as we said, are going to be more like $43,000. And an even longer way from the $57,000 in gross purses that we estimated a horse has to earn in order to take home $43,000.
So is there a lesson in all this? The moral I take from it is that we'd all better be in this game for the thrills, the excitement, and the beauty of thoroughbreds, and be willing to pay a bit for the privilege of being associated with them. If we're looking at race horse ownership to pay the rent, we're in the wrong business. If we're even hoping our horses will pay for themselves, we're probably dreaming. Yes, that highly unusual, very good horse -- the one we all hope to have every time we look at those two-year-olds in the Fasig-Tipton sales barns -- will more than pay its own way. But most won't -- and we'll all be in a better, more pleasant frame of mind if we can remember that.
Sunday, 6 July 2008
I've updated my previous post to reflect the Ellis Park agreement. This is an important victory for fairness, and for the horsemen.
Also, the press is reporting that horsemen have reached an agreement with Calder, which is owned by Churchill Downs, Inc., covering the contributions to purses both from simulcasting and the soon to be installed slot machines. No details are yet available, but it's another positive sign.
Friday, 4 July 2008
The simulcast issue is almost certainly not the real reason that Geary closed the track, treatening to deprive Kentuckians of a summer racing venue that had been around for over 80 years. Maybe he couldn't take the competition from Indiana casinos, maybe he just planned to sell the plant for its real estate value, but the horsemen's stance on simulcasts certainly made for a useful whipping boy. And Geary, who bought Ellis from Churchill Downs Inc. just two years ago, was, wittingly or not, acting as an ally of the Churchill conglomerate when he blamed the horsemen for closing down the place.
Now, horsemen -- that's us owners and trainers -- need one thing to make a living, and that one thing is racing. If we can't run our horses, all we're doing is operating a very expensive boarding house for equines and biding our time until we can sell them into the completely insane breeding market. But, seriously, we're in the game to race, and we wouldn't do anything that eliminates racing if we can help it.
But when we do race, we want a fair share of the money that our horses generate, and that fight for a fair share has, just in the past few months, heated up as horsemen around the country have, at long last, begun negotiating for a reasonable split of simulcast revenue.
And now, a short detour into history, in order to explain how horsemen have the power to do this. Under the federal Interstate Horse Racing Act of 1978, all horsemen's associations (except the one at the NYRA tracks in New York) have the right to refuse permission for the export of a simulcast signal, whether to all or only to specified outlets. When Congress passed that act, it's major purpose was to ensure that the then newly emerging simulcast business would not run afoul of the federal Wire Act, an Al Capone-era statute designed to prohibit illegal gambling. But as the act emerged from Congress, it also included a provision giving most horsemen's groups the right to negotiate about where the simulcast signal could go.
Over the past three decades, horsemen's groups have come to realize that they can use this power to negotiate contracts with the race tracks. In other words, where horsemen have the power under the 1978 Act to block simulcasts, they can use that power the same way a labor union uses the threat of a strike as leverage to secure a decent contract. Blocking a simulcast signal doesn't necessarily shut down racing entirely, but it certainly focuses the attention of race track management. As the importance of simulcasting has grown, the horsemen's power under the federal law has also grown, particularly for those tracks that have an attractive racing product.
(he horsemen's association at the NYRA tracks was cut out of the 1978 Act on the patently absurd grounds that NYRA was a not-for-profit institution and therefore (?) shouldn't have to get its hands dirty negotiating a contract. Funny, NYRA seems to do just fine negotiating contracts with its mutuel clerks and maintenance workers, so why not the horsemen?)
In the old, B.S. era (Before Simulcasting) the issues that mattered to horsemen were pretty simple: how many races would be run, what kind of races would they be, what was the track condition going to be like, and, most important, how much money would be going into purses. Traditionally, purses were a set or negotiated fraction of the track's betting handle. If average takeout was, say, 15%, then a typical deal might give half that amount to the race track for its operations and dedicate the other half, say 7.5%, to the purse account. Race track management would have to estimate the amount going to purses when the racing secretary wrote the condition book, but there was usually a mechanism in place either to give the horsemen a meet-end bonus if betting was better than expected, or to cut purses at the start of the next meet to reflect a shortfall.
But as simulcasting, first to other race tracks and OTBs and, recently, to the so-called ADWs (advance deposit wagering sites, typically online) has increased, the calculation, and negotiation, of how much of what's bet on the races ends up in the purse account has become far more complicated.
Last year, roughly $15.4 billion was bet on horse racing in the US. Of that, almost 90% was bet off-track, at other racetracks that receive a simulcast signal, at OTBs, at casinos, dog tracks and jai alai frontons, and, increasingly, at online wagering sites, or ADWs.
The growth of these off-track avenues for betting has substantially increased total handle, which should be a good thing for racing, as a portion of every dollar bet ends up in the purse account, where it pays owners some fraction of what they spend on buying and caring for their horses. The bigger the purses, the more likely it is that owners will come into and stay in the game. But, because simulcasting introduces additional entities into the wagering stream, the same amount of takeout now has to be carved up into more than two pieces, complicating the determination of how much of the betting dollar the horsemen can claim.
Typically, horsemen's contracts with race tracks provide that half of all the money that the track receives from the simulcast wagers -- sometimes after an allowance for race track expenses -- will go into the purse account. (Click here to see a typical contract.) Sounds good, but it all depends on how much the track itself receives for the simulcast.
Usually, it's been left to the race tracks to negotiate with the entities that receive their simulcast signals. Sometimes, as in the case of New York's regional OTB corporations, that percentage is set by legislation. More often, it's just a contract negotiation between the track and the simulcast outlet. And the tracks haven't been asking for much.
In the early days of simulcasting, the tracks were happy just to get their signal out there, so they made sweetheart deals with other race tracks under which the sending track would get back only 3% or so of the amount bet, leaving the receiving entity with the bulk of the takeout (in my example of a 15% takeout, the simulcast wagering outlet would keep 12% of every dollar bet, leaving the sending track and the horsemen with only 1.5% each). Of course, since tracks were mostly making deals with each other, there may have been a sense of professional courtesy involved, even though the amount of wagering was far from even. Bettors at Rillito Downs in New Mexico would wager a lot more on Saratoga than Saratoga bettors would wager on Rillito, even if they could get the latter's signal.
Then, when casino race books and online wagering sites came on board, those new wagering sites used the early race track contracts as precedent to argue that they shouldn't pay much more than 3% for the major-league tracks' signals, either. That allowed them to offer sizable rebates to their best customers, drawing big-time gamblers away from the tracks to set up shop in Las Vegas, or even in a couple of cases, to set up their own OTBs in such traditional racing jurisdictions as North Dakota or the Cayman Islands. As any handicapper knows, it's a lot easier to beat the races when your effective takeout is 3% than when it is the 15% they charge at the race track. Just ask super-handicapper Ernie Dahlmann, who left New York for a suite, and large rebates, in Las Vegas.
Gradually, and often at the urging of their horsemen, tracks have been pushing for a fairer share of the revenue from simulcast and off-track wagering on their races. Most simulcast contracts with outlets other than thoroughbred tracks (i.e., casinos, ADWs, harness tracks, etc.) now return more than 3% to the track where the races are actually run, but the percentages are still less than the takeout; in fact, they're generally far less than half the takeout. And, since the purse account generally gets only half of what the sending track receives, that means only 2-3%, at best, of the amount bet at simulcast sites finds its way to the purses of the sending track.
The Thoroughbred Horsemen's Group was formed last year by seven different horsemen's associations to address the simulcast revenue problem, a problem frequently described as "handle up, purses down." The THG has since grown to include at least 18 horsemens groups in 16 states covering 52 race tracks. (Disclosure: I'm a member of the Board of the New York Thoroughbred Horsemen's Association, which is not -- yet -- affiliated with the THG. Partly because, as noted above, NYTHA, unlike every other horsemen's group in the country, doesn't have a legal right to negotiate contracts with its race track management.)
The THG has been designated by a number of horsemen's groups to handle negotiations with tracks, especially on the issue of the division of simulcast revenues from ADWs. Despite the race tracks' claims that using the same negotiator is a violation of antitrust laws, this is just doing what employers do all the time. There are law firms that specialize in union-busting campaigns and hard-nosed negotiating, and they work for lots of employers in the same industry. So why shouldn't different horsemen's groups have the right to hire experienced, competent negotiators? Or is it that the track-media-ADW conglomerates like Churchill and Magna just can't take the heat? If that's the case, we can point them toward the kitchen door.
Although each negotiation is somewhat different, reflecting the specific situation of each race track, the basic position that the THG has been advancing is that 7% of what's bet on any thoroughbred race should end up in the purse account, wherever that wager comes from. That's roughly comparable to what happens when the money is bet on-track. Since most tracks have a blended takeout rate of 20-21%, that 7% is royghly one-third of the takeout, just what the Ellis horsemen got in their negotiations.
As the negotiations have heated up, it's become clear that the horsemen's principal antagonist is not a casino, or an OTB, or an independent ADW, but rather Churchill Downs, Inc. (CDI). Now, most of us might think that Churchill is a race track company -- after all, we knew it when all it owned was Churchill Downs, and it still owns a bunch of race courses, including Arlington, Calder and Fair Grounds, though it's sold off Ellis Park and Hoosier Downs just in the past two years. And, thinking of it as a race track company, we would be sympathetic to the idea of increasing its revenue from the export of its very popular signal. But Churchill's management doesn't share that delusion. They know that they're really an online wagering company that happens to own a few race tracks. Churchill has formed a joint venture, TrackNet Media, with Frank Stronach's Magna Entertainment (which is the owner of Santa Anita, Gulfstream, Pimlico and Laurel, among others), to exploit the online wagering market . Churchill also owns the slot-machine operation at the Fair Grounds, as well as some 20 OTB locations around the country. And the two big corporate players are evidently looking to a future in which just about every horse racing bet is placed online and they control the lion's share of that market.
Churchill's recent filings with the Securities and Exchange Commission show why it wants to shift wagering from the tracks, even its own tracks, to its OTBs and ADWs. According to its own figures, Churchill nets 19.9% of the handle from "Other Investments" (i.e., OTBs and ADWs), compared to a range of 6.7%-12.3% from its various race tracks. No wonder Churchill sees its future online.
From Churchill's point of view, the economics are simple. If a bet is made at the race track, purses get 7%, the track keeps 7% or so, and a little goes to the state. If a bet is made at Churchill's online site, twinspires.com, then Churchill gets to keep all of the takeout except the 1.5-2% that they remit to the purse account. No wonder they don't want to promise the horsemen a 7% share.
The principal battlefields in this war have been Churchill Downs itself and Calder in South Florida, which is also owned by CDI. At each track, the local horsemen's group has used its power to block export of the simulcast signal to ADWs, including the ones owned by CDI. And at each track, CDI management has cut purses by 20% -- considerably more, the horsemen say, than is warranted by the revenue loss attributable to the simulcast ban. Because of the purse cuts, some owners have picked up stakes, field sizes are down, and handle, of course, is greatly diminished. At Calder, for example, total handle through June 30th for the meet that opened April 26th was down 72% compared to last year, to an average of $762,000 a day. At that rate, and until there's a substantial contribution to purses from the slot machines authorized by last year's Miami-Dade County referendum, it's hard to see how year-round Florida racing can continue. My own trainer in Florida, Kathleen O'Connell, reported that she had only one owner send her to the Ocala two-year-old sales this year to look for horses, compared to four or five in prior years.
Although final figures are not yet available for the Churchill Downs meet that ends on July 6th, early figures showed that total handle was down only 2.7% as a result of the ADW-simulcasting ban. Nonetheless, Churchill Downs also cut its purses by 20% on May 10th. Churchill then followed that retaliatory cut with a lawsuit aimed at the THG and at its horsemen, even naming individual directors of the Florida HBPA as defendants. War has been declared.
Horsemen don't have a lot of options. We could simply refuse to enter our horses at tracks that don't provide a fair share of simulcast revenue. But too many of us operate to close to the financial edge to be able to withstand an "entry strike;" we don't have the kind of strike fund that successful labor unions maintain, and we have huge costs every day just to care for our horses. Besides, if such an entry strike were to occur, you can be sure that the race tracks would be at the courthouse with antitrust claims within hours.
Alternatively, we could go to our various state legislatures and regulatory bodies, and lobby them to mandate that a fair share of the various streams of wagering revenue go to purses. That's the route we've had to follow, with some success, in New York, where we don't have right to block the simulcast signal. But that kind of lobbying takes time and money and is subject to the vagaries of politics, where, as in Kentucky just this week, a new Governor can throw out his predecessor's racing regulators and replace them with his own gang.
(Shameless pitch: the New York Thoroughbred Horsemen's Association is running a golfing outing on Monday, July 7th, to support our political action committee's work in Albany. It's a good cause that has won major benefits for owners and trainers in the past few years, so we'd like to keep it well funded.)
Finally, outside New York, we horsemen can use the weapon that Congress gave us in 1978, the right to block a track's simulcast signal. That's what's happening in Kentucky and Florida, and CDI's huge over-reaction shows that it's a weapon that works. And the horsemen's victory at Ellis might just be the opening salvo in what will become an ever more bitter war.
The confrontation between horsemen's groups and the Churchill-Magna behemoth may not have quite the epic stature of historic labor battles such as the United Auto Workers' sit-ins at Ford in the 1930s or the coal miners' strikes led by Mother Jones in Appalachia, but it might be one of those events, like those labor actions, that marks a real turning point in an industry, providing a decent livelihood and a bit of dignity for those who dare to oppose corporate power.