Sunday, 30 August 2009

Inside the Inner Sanctum

This past Sunday, I attended my first Jockey Club Round Table, the annual event hosted by the racing world's aristocracy in Saratoga. By now, most of those interested in racing will have seen the press reports on the Round Table (here, for example), all of which focused on the call by Louis Romanet of France for the US to join the rest of the so-called civilized world and ban Lasix, at least in the more important stakes races.

But the bulk of the Round Table actually concentrated on less contentious issues: the necessary changes that need to be made to ensure a level, drug-free (except, of course, for Lasix) playing field, safer race tracks, and the assurance of retirement homes for horses once their racing careers are done. All these initiatives are necessary, minimum requirements to restore a little bit of public confidence in racing, and it's a good thing that the Jockey Club can use the influence of the 100 grandees who are its members to pull together industry initiatives, about which more later. But all these efforts, however noble, won't be sufficient to save the industry, and it's unlikely that leadership on the tough questions of downsizing and coordination will come from a group that's done so well with the status quo. As I recall, the Second Estate (the nobility) didn't do so well in the Revolution.

Not that I'm looking a gift horse in the mouth, or at least not entirely. It was nice of the Jockey Club to invite someone (me) who's a fairly persistent critic of industry self-satisfaction, and I particularly appreciate that Jockey Club President Alan Marzelli made a point of coming over and welcoming that persistent critic.

Nonetheless, the Round Table is most definitely not an occasion for an open, back-and-forth discussion of racing issues. Unlike many public programs, there is no opportunity to ask questions of, or debate with, the speakers. The meeting is carefully scripted, with speakers kept to their time limits, and the audience just that, an audience, even if it did consist of most of the important names in the racing business.

Now, for the details: the Round Table session was roughly divided between reports on race track safety and thoroughbred retirement, on the one hand, and drug testing and enforcement on the other. (a full transcipt of the Round Table is available on the Jockey Club web site.) And there is indeed a lot of incremental progress being made in these areas. For example, the Jockey Club itself has set up a free service to help people who may have acquired a retired thoroughbred research the tattoo number and identify the horse. And, as Diana Pikulski of theThoroughbred Retirement Foundation reported, the various retirement programs are expanding as fast as they can obtain more funding. The Jockey Club, which registers all new thoroughbred foals, has instituted a checkoff option so that breeders can contribute to a retirement fund when they apply for their foal papers. (Some race tracks, including NYRA, have set up their own voluntary funds, financed by the tracks and the owners, to provide additional retirement money.) All good initiatives, though they won't provide homes for the 1.3 million thoroughbreds living in North America (roughly 15% of all American horses are thoroughbreds.) As a lawyer, I found myself wondering whether it wouldn't be possible to use the emerging legal device of a "pet trust" (think Leona Helmsley, who left most of her money to her dog) as a vehicle for funding thoroughbred retirement. Though it probably wouldn't be such a good idea to entrust the funds in such a trust to the same people who've presided over the Jockey Club's and the Breeders Cup's recent investment losses.

The discussion of race track safety came, unfortunately, just before the release of the recent report on fatalities on synthetic tracks in California, and before theArlington Park accident that threatens to leave young jockey Michael Straight paralyzed -- the second such calamitous accident on Arlington's synthetic surface this year. Those development confirm what a lot ofus already knew; synthetic tracks aren't a panacea. What keeps breakdowns to a minimum is a combination of good track superintendents who have the resources to keep their surfaces well-maintained, and trainers who won't send out horses that are only marginally fit. Both those factors depend more on the economics of racing than on scientific studies.

The second half of the Round Table program, focusing on drug issues, raised a number of interesting questions, with all the participants substantially agreeing on a range of issues, except for Lasix. The Jockey Club showed some courage in inviting people who take a tougher stand than do most trainers and state regulators: Joe Gorajec, chair of the Indiana Racing Commission, Steve Crist of the Racing Form, and, of course, Monsieur Romanet, scion of a leading French racing family and chair of the International Federation of Horseracing Authorities. But, while urging tougher drug rules, including meanigful suspensions for trainers, and perhaps owners as well, and the banning of such commonly used meds as "bleeder adjuncts" like Amacar or Kentucky Red; non-steroidal anti-inflammatories like Bute and topical corticosteroids, all of which should probably be banned because they're either harmful to the horse, or mask conditions that could lead to serious injury on the track, or both.

The big issue that continues to defy agreement is Lasix. The recent South African study makes the point, as US horsemen are delighted to tell you, that Lasix does indeed have a therapeutic effect; it substantially reduces the incidence of bleeding in the lungs of horses when they're racing; horses without Laix were found to be three to four times more likely to show any evidence of bleeding than those treated with Lasix, and seven to 11 times more likely to have severe bleeding. No question; it's a drug that works.

But Lasix also is a huge performance enhancer. It's easy to understand why. For a start, the horse treated with Lasix will lose 12-14 pounds of water; that's equivalent to going from a 126-pound weight to a bug boy carrying 112 pounds. Some trainers also believe that Lasix can effectively mask the use of other drugs that may be prohibited; I understand that the better testing labs can "see" the other drugs through the Lasix, but we don't know for sure. And trainers of horses coming over to the US from Europe certainly aren't shy about adding Lasix, with good reason. Raven's Pass and Henrythenavigator looked pretty good on first-time Lasix at last year's Breeders Cup Classic, and just yesterday, Salve Germania, an Irish invader with, to be charitable, a mediocre record in Europe, came over to Saratoga and, on first-time Lasix, won the Grade II Ballston Spa Handicap at odds of 24-1, beating such established US fillies and mares as Rutherienne and Cocoa Beach.

Just as trainers have adjusted to the new ban on anabolic steroids in the US, they could adjust to a ban on Lasix, or rather a reestablishment of the ban that existed, in New York anyway, until just 15 years ago. But we've been breeding horses for two decades now that are more and more susceptible to bleeding, so the adjustment period would be difficult. Don't hold your breath waiting for the US to rejoin the rest of the world.

From my own perspective, a very interesting aspect of the Round Table was the agreement of all the US speakers on the drug issue that racing should stick to the self-regulation model (you know, the one that's worked so well to prevent fraud in the securities markets) and not, heaven forbid, have uniform federal regulation. The vehicle of choice seemed to be "interstate compacts" that would allow the various state racing authorities to adopt uniform rules without having to go back to their legislatures every time they wanted to change the rules. Now, anything that keeps racing out of the hands of the comically inept New York State legislature is probably a plus, but I wonder why there's such an aversion to unified, federal standards. Are the rules of the Food and Drug Administration, the Securities and Exchange Commission, or the Occupational Safety and Health Administration really so terrible? (Ah, I forget, to the "just say no to health care" crowd in the Republican Party, any rules that interfere with the ability of the rich to do what they want are terrible.) Racing is certainly an industry that impacts interstate commerce; why shouldn't it be subject to federal oversight?

I appreciate the opportunity to take a look inside the tent, and one must give credit for those initiatives that are underway on safety, drug and retirement issues. But oh so much more needs to be done. Can we structure a racing industry that's viable over the long term? Can we make the game attractive to new fans, and keep those we have from spending themselves out of action? OK, these questions weren't on the agenda for the Round Table, but I do think I saw a couple of very large gorillas lurking in the shadows of that conference room last Sunday.

Friday, 21 August 2009


The desire to monetize online news is leading some to enthusiastically promote micropayment systems. A number of the leading newspaper sites are leaning toward a cooperative payment system that will allow readers to use a single account to access material at the leading papers. Such a system will not be technically difficult to implement, but getting the price right will be a significant challenge because of transaction costs and significant differences in the economic value of articles.

To create the best industry wide effects, a micropayment payment system would need to include as many papers as possible (see "The Challenges of Online News Micropayments and Subscriptions" The fact that a consortium is currently being sought only among the major players illustrates, however, that such a system would be cost inefficient because content from smaller papers would attract fewer transactions and be more expensive to service.

A widely inclusive system would encounter the problems of small payouts that have plagued collecting rights societies for authors, composers, and performers. Those systems have found that the costs of managing transactions, accounting and auditing, and conveying funds to rights holders incur higher expenses than the payments due many rights holders and that such a system is possible only when the rights holders and content that generate the most transactions subsidize those that generate the least.

This occurs because each right must have a separate account, uses of all rights must be monitored and recorded, funds must be collected, expenses for accounting, auditing and other administrative costs paid, and funds must be transferred to recipients. These activities incur significant transaction costs.

Even a cooperative system limited to newspapers that attract the largest number of customers will encounter transaction cost challenges.

In single content sales systems, for example, the cost of making transactions takes up the bulk of the price. In the sale of mobile telephone ringtones, for example, the composer, arranger, and performer get only about 20% of the price. For digital song downloads everyone associated with the content--songwriter, arranger performers, and record company--receive less than half. This occurs because merchant and financial transaction costs are very high. The cost for using a credit card adds 5 to 7 percent to merchant costs and the expense for bank processing of each transaction is a minimum of about 25 cents. Even electronic fund transfers between bank accounts incurs about 30 cents in transaction costs.

These realities will affect the structure and pricing of newspaper article micropayment purchases. The most efficient system for users and firms will require the use of prepaid customer accounts to reduce the number of bank system transactions. This will allow users to transfer funds to their accounts and then purchase articles at pennies a piece. Funds collected would be then periodically transferred to papers. Such a system could also include the option for occasional users to make credit cards purchases of articles, but the price would have to be $2 to $10 per article to make it worth the effort.

The biggest pricing challenge, however, is that some articles will be more valuable than others and will be most sought after by consumers. This means newspapers will have to figure out BEFOREHAND which stories fall into those categories and they will have to decide what prices to charge for them. Papers will have to hire personnel to try to figure out before publication which are the most economically valuable stories--something that will be extremely hard to do--or they will have to set prices based on the costs invested in creating each story (something current newspaper accounting systems do not support). In either case, increased costs will result. The only other reasonable option is to set prices per article based on the overall average cost of producing an article or a column inch of editorial copy. This, of course, over and under prices content simultaneously.

Moving to a micropayment system is not merely a matter of starting to charge for content online, but involves changing the fundamental business model of papers. Newspapers have historically bundled all content into one product available at a single price. In retailing, bundling has always worked best for getting consumers to buy more of the product at a lower price than if bought individually. With this tactic the producer gains profit because the costs of distribution and sales are collectively lower. A second tactic involves bundling products of unequal or uneven value that are sold together to achieve a joint price that is higher than would have been obtained individually.

Newspapers have historically benefited from such bundling by filling pages with relatively inexpensive news agency and syndicated content and by including huge amounts of information culled from public sources that did not require significant investment of resources or added value. Unbundling and selling individual articles with a micropayment system will produce little consumer willingness to pay for this type of content--a significant problem because it is the bulk of editorial content in most newspapers today. Unbundling will also increase transaction costs, thus reducing profitability. This will force higher prices on consumers that will affect demand.

Disaggregating the newspaper and making more money off some individual articles will also create pressure for additional payments from journalists who write the most valuable articles. This will also increase costs of the micropayment system.

Making money from online journalism is, thus, not just a matter of saying "Let's all start charging." It will require fundamental rethinking of the value chain, what content is offered, and how it is produced. It will also require significant thought about what's in it for consumers--something that is glaringly missing from current discussions of starting online payments. The consumer challenge is especially salient because most online news readers do not currently buy newspapers. If they are not willing to pay for news in print, why will they suddenly be willing to pay for that same news online? If papers can't figure that out, no decision to implement micropayments will end happily.

Wednesday, 19 August 2009


I received another letter from the Google Book Search Settlement Administrator this week informing me that my rights will be affected by the proposed settlement of the class action suit against Google for copyright infringement by scanning books and other publications. I have been a de facto part of the class action lawsuit because I am the author of numerous books, chapters, and other publications affected by Google’s decisions to scan and sell copies of materials still protected by copyright.

The settlement has been supported by the Association of American Publishers—which represents major publishers—because it protects their interests, but it is opposed by the National Writers Union and the American Society of Journalists and Authors because it seriously degrades the rights and interests of those who actually write the content. The split between publishers and authors is not surprising because anyone who has observed the uneasy relationships between musicians, authors, scriptwriters and recording, publishing, and production companies immediate recognizes they have very different and competing interests.

Under the proposed settlement, the court will take away portions of my copyrights that were created under legislation and protected by international treaties and it will give them to Google. The only way for me to protect my rights is to take deliberate affirmative action to opt out of the settlement and to seek to enforce my rights against Google individually—not a great option since its capacity to hire lawyers and stretch out litigation is far higher than mine.

The process and effects of the settlement are stunning and will dramatically alter authors’ rights. For nearly a hundred and fifty years copyright law has recognized that copyrights belong solely to the author (or persons to which the authors sell them) and that commercial uses of copyright material can only be made through negotiating terms of use and payment with the copyright owners.

The Google settlement will essentially rewrite copyright law by allowing the company to use the material without permission, without negotiating how the material will be used, and without negotiating compensation and payment provisions. It is particularly offensive because the court will be saying the government doesn’t have to protect authors’ rights, but authors’ have to protect their own rights. This is a significantly different approach from that which prosecutors and courts have taken in the cases of music, game, and software file sharers who have violated copyright on the Internet.

The settlement disassembles the basics of copyright law without legislative consideration and essentially forces the results on rights holders. Its effects are far reaching. Not only does the settlement apply to U.S. authors, but it is binding to authors worldwide even if they are not aware their rights are affected by the suit.

The settlement turns copyright upside down. Instead of protecting authors’ rights, the proposed settlement asks the court to reallocate the economic and moral rights to authors’ work, to give Google rights to use their material, and to determine the compensation authors must accept. To make matters worse, the effect of the settlement essentially gives Google a monopoly over the scanned publications and does require the company to make them available to other online services that might offer them at different prices or with different compensation for authors.

The proposed settlement is theft—pure and simple—and its proponents want to ravage and rewrite authors rights so that Google's acts will no longer be defined as larceny. The result will reward Google for illegally appropriating material, hardly a message that society should want to send to thiefs.

If the court accepts the settlement, authors will be victimized for the sake a $150 billion Internet company and the world’s biggest publishers. Where is the equity and the justice?

Tuesday, 18 August 2009


Thanks to my friend Jeff Seder, of EQB, Inc., for bringing this to my attention:

The judge in the Magna Entertainment bankruptcy case has ruled that Magna Entertainment's creditors (which includes just about everybody in the racing industry) can pursue claims not only against Magna Entertainment itself, but also against its chairman, Frank Stronach, and against the Stronach-controlled company, MI Developments, that was the nominal parent of Magna Entertainment. The full story is here.

As readers of this blog already know, Magna Entertainment, which holds such major league racing properties as Santa Anita, Gulfstream, Laurel and Pimlico, filed for bankruptcy some months ago. For years, Magna Entertainment was propped up by a series of loans and equity ifusions from MI Developments (MID), often over the protests of minority shareholders in MID, who rightly accused Stronach of using that company to toss good money after bad to support Stronach's dreams of a thoroughbred racing empire.

Bankruptcy judge Mary Walrath, in Delaware, allowed the Magna Entertainment creditors committee to move forward with its effort to prove that some $125 million in MID injections into Magna Entertainment were, in the terms of the bankruptcy code, fraudulent transactions. Good news for the creditors, bad news for Frank and his compliant MID directors.

Much more is sure to emerge in the coming months.

Sunday, 16 August 2009

Behind the Numbers at the Saratoga Sale

As everyone knows by now, the recently completed Fasig-Tipton select yearling sale at Saratoga was a welcome change from the past year's pattern of steady declines at all thoroughbred sales. The Saratoga sale's gross proceeds were $52,549,500, for 160 horses reported as sold, compared with $41,082,000 for 142 sold last year. The average and median prices, as already reported, were also up substantially.

A closer look at the details of this year's Saratoga sale, though, casts some doubt on the upbeat message that Fasig-Tipton and industry insiders tried to carry away from the sale. The following are only a few of the factors that suggest the market for thoroughbreds has a long way to go before it reaches bottom.

1. The Influence of Sheikh Mohammed

The Fasig-Tipton auction house was recently purchased by Synergy Investments Ltd., a Dubai-based company about which it's almost impossible to discover anything (see my report earlier this year). One presumes that the purchaser is, at least, closely linked to Dubai's ruler, Sheikh Mohammed. In any event, money from Dubai was responsible for major investments at Fasig-Tipton's Saratoga sales grounds, with fancy new wrought-iron fencing, a new outdoor walking ring, and the most spectacular bathroom ever seen at a horse sale. The new F-T also made a major effort to bring in high-end foreign buyers, offering assistance with travel and the financing of purchases, as well as a round of parties to loosen up the purchasers' wallets.

But the biggest single influence at this year's sale was the presence, and the purchasing, of Sheikh Mohammed himself -- appearing on the grounds for the first time in over 20 years. The Sheikh, acting through his main man, John Ferguson, and together with closely linked buyers Shadwell and Rabbah, bought a total of 22 yearlings, for $14.5 million, an average of $660,000. That was more than double the Sheikh's typical buying at Saratoga; in 2008 he and related entities bought 10 for $4.4 million, and in 2007 they bought nine for $5.5 million. So virtually all the increase in the sale's gross can be attributed to one man.

In addition, the pattern of Sheikh Mohammed's buying this year was significantly different this year. At previous sales, he'd actively sought out new sire lines and new female families to expand his holdings. This year, in contrast, more than half the Sheikh's purchases -- 13 out of 22 yearlings -- were by his own sires, Bernardini, Street Cry, Medaglia D'Oro, Singspiel and Henny Hughes. By purchasing yearlings from his own stallions, Sheikh Mohammed was not only propping up the Fasig-Tipton sale; he was also propping up prices with an eye to encouraging breeders to keep sending their mares to those sires.

2. Demi, Where Are You?

In contrast to the ubiquity of the Sheikh, John Ferguson and the rest of the Dubai entourage, the other major international player at the top of the market -- Ireland's Coolmore -- was a barely detectable presence in Saratoga. I did see their chief bloodstock agent, Demi O'Byrne, looking at a number of horses, but they bought only one, a Giant's Causeway colt for $425,000. It's probably no coincidence that Giant's Causeway stands at Coolmore's Ashford Stud in Kentucky.

Coolmore traditionally doesn't buy a lot at Saratoga; in 2007, they bought three yearlings for $1.5 million, and last year they bought only one, but that one was a $2 million Storm Cat colt. But this year, their presence was especially elusive.

3. Creative Accounting

Another change this year is that Fasig-Tipton is reporting as "sold" those horses that did not meet their reserve price in the ring, but were later sold while still on the grounds, provided that the sale was processed through the auction company. It's fairly common for sellers to make a private deal after a horse fails to meet its reserve, and often, those sales will be processed through the auction company, especially if the seller doesn't know the buyer and wants to have some assurance that the buyer will pay up (virtually all sales at the major auctions are made on credit, with payment not due until 15 days after the end of the sale).

This year, four Saratoga yearlings were listed as "post-sales" but still included in the statistics for horses sold. If the sale was reported in a manner consistent with previous years, there would have been only 156 horses sold, rather than the 160 that Fasig-Tipton reported. In turn, that would have meant that 66.4% of the horses listed in the sale catalog were sold -- exactly the same percentage as in 2007, although still somewhat higher than 2008's 62.6% I prefer to use the percentage of the catalog that's sold as a better indicator than the traditional "percent not sold," which counts only those horses that actually pass through the sale ring. In a bad sale, many horses will be scratched before they ever reach the ring, and that reduces the "not sold" percentage. But the consignors of the scratched horses will still be taking them home unsold, just like the consignors of the horses that failed to meet their reserve.

4. Where Were the Pinhookers?

In prior years, pinhookers looking for precocious and promising horses were a significant factor in the Saratoga sales. This year, they were conspicuous by their absence. For example, in 2007, purchasers whom I could identify as pinhookers bought 17 yearlings for $4 million, an average of $235,000. And last year, pinhookers bought 20 yearlings for $3.1 million, an average of $153,500. This year, pinhookers apparently bought only eight yearlings for a total of $1.7 million, and even that total is suspect, as it includes two expensive purchases by Mike Ryan, who buys both for pinhooker Niall Brennan and for "end user" racing clients. Without Ryan's purchases, the pinhooking numbers for 2009 would be six yearlings for $850,000, the lowest total in many years.

5. Vanishing Legends

Last year, Kenticky insider Olin Gentry put together the Thoroughbred Legends Racing Stable, self-described on its own website as aiming to become the most successful thoroughbred stable in America. As reported in the financial press, the goal was to raise $75 million and purchase horses over three years, beginning in 2008. The horses were to be placed with Hall of Fame trainers D. Wayne Lukas, Bob Baffert and Nick Zito. So far, the first Legends crop isn't exactly beating a path to the Breeders Cup; in four starts at Saratoga, they've finished 4th, 7th, 8th and 10th, with average earnings per start of $1,047 (the meet's leader among partnership operations as of today, by the way, is West Point Thoroughbreds, with average earnings per start, due to their stakes horses, of $31,489).

At the 2008 Saratoga yearling sale, Thoroughbred Legends bought nine yearlings for $3.3 million, an average of just over $360,000. In addition, the Legends trainers individually bought another two for similar prices. Legends then made a major attack at the Keeneland September yearling sale, buying 29 horses for just over $12 million.

This year, Legends didn't purchase a single Saratoga yearling, not one. Lukas, Baffert and Zito did combine to buy three at Saratoga, presumably for their own current or prospective owners, but one wonders whether the grand plan has come apart, and whether perhaps only a small fraction of the $75 million target was actually raised.

6. Ahmed Where Art Thou?

Also absent from this year's Saratoga sale purchase list was leading thoroughbred owner Ahmed Zayat. In 2007, Zayat had bought five Saratoga yearlings for $1.5 million, and then went on to Keeneland, where he bought 39 more for $8.6 million. Last year, he skipped Saratoga, but continued as a major buyer at Keeneland, with 30 yearlings for $6.7 million.

This year again, Zayat skipped the Saratoga sale.We'll know in a few weeks whether his support at the top of the market will be showing up at Keeneland.

7. New York-Bred prices collapse

While the Saratoga Select sale on Monday and Tuesday produced excellent gross numbers, the New York-bred yealing sale that followed, on Saturday and Sunday, was a disaster for breeders. The gross plunged by 20% from the already weak level of 2008, and more than half the horses in the NY-bred catalog (128 of the 235 catalogued) failed to find a buyer. Without the presence of Sheikh Mohammed and his entourage, and with the numerous foreign buyers who came for the Select sale, there was simply not enough money and too many horses.

New York thoroughbred breeding has clearly expanded beyond any rational level, spurred by a generous state-bred incentive program that rewards breeders and stallion owners whenever their foals earn purse money. That fund, like pretty much everything else in the New York state budget, is now feeling pressure, and its owner-incentive awards, for running NY-bred horses in open-company races, have been substantially cut back. That means buyers of NY-breds have reduced expectations for their horses' earnings, and those lower expectations translate directly into lower bids at the auction, or, as in the case of many horses at the NY-bred sale, into no bids at all (those horses were reported, though, as RNAs with the minimum $5,000 bid, another bit of creative accounting).

From the breeders' point of view, the only bright spot at the NY-bred sales was the reappearance of the pinhookers, who had been notably absent at the select sale earlier. Leading pinhookers, including Jim Crupi, Nick DeMeric Becky Thomas and Robert Harris, all made NY-bred purchases. There are no a good many NY-breds sired by fashionable Kentucky stallions, some of which apparently make good pinhook prospects.

Still, a few pinhook purchases won't do much for the majority of New York breeders, whose mares just don't have the quality, nor the catalog page, to support a high auction price.

So What Does It All Mean?

Fasig-Tipton, under its new, Dubai-based leadership, made a huge effort for Saratoga: new facilities, a spectacular catalog, loaded with high-quality black type, active courting of foreign buyers, and a personal appearance by Sheikh Mohammed and his money. And, for one brief shining moment, it all seemed to be working. If you were a breeder with a good-looking yearling with a fine pedigree, F-T could find a buyer for you.

But, for the reasons described above, the Saratoga sale's success masks some serious problems, and does nothing to address the weakness in the thoroughbred industry. As I'm sure we'll see at Keeneland, where 25 times as many horses will be on offer as were available at Saratoga, The US recession and financial collapse means that there aren't enough buyers for the horses that are out there. Breeders have begun to realize that; the projected 2010 foal crop is down to levels last seen in the 1970s, before Coolmore and the folks from Dubai began dueling at Keeneland and sent the industry into its first speculative bubble in the 1980s. But the likely 15% cut in the foal crop won't be nearly enough. A major restructuring is heading this way, and it's going to put a lot of breeders out of business. In the long run, that's probably a good thing; we have too much racing and too many horses now. But along the way, a lot of people, especially the smaller breeders who are in it because they love horses as much as they like profits, are going to get hurt.

Friday, 14 August 2009


One of the most exciting developments in journalism is the widespread appearance of online news startups. These are taking a variety of not-for-profit and commercial forms and are typically designed to provide reporting of under-covered communities and neighborhoods or to cover topics or employ journalistic techniques that have been reduced in traditional media because of their expense.

These initiatives should be lauded and supported. However, we have to be careful that the optimism and idealism surrounding these efforts not be imbued with naïveté and unbridled expectation. All these initiatives face significant challenges that require pragmatism in their organization and sober reflection about their potential to solve the fundamental problems in the news industry today.

We need to recognize that these online initiatives are not without precedent. We can learn a great deal about their potential from other community- and public affairs-oriented media endeavors. Community radio, local public service radio and television, public access television, and not-for-profit news and public affairs magazines have existed for decades and provide some evidence about the potential of the startups. Most rely heavily on the same types of foundation, community support, and membership financial models that startups are employing and this gives them a head start in the competition of those resources.

Despite sharing fundamental objectives and goals, these existing news and public affairs enterprises exhibit wide differences in the services they provide and their effectiveness in offering them. Many suffer from precarious financial conditions.

For the most part, such initiatives are highly dependent upon volunteer labor, individuals with the best of intentions who contribute time and effort. Those who manage the operations must expend a great deal of effort to train, coordinate, motivate and support these volunteers. This incurs cost and takes time from other activities.

Most of the organizations operate with highly limited staffs of regularly employed personnel and this is especially true in news operations. Professional journalists working in these organizations tend to be poorly paid; few have health and retirement benefits; most do not have libel insurance that protects aggressive and investigative reporting; few have access to resources to invest time and money in significant journalistic research. The consequence of these challenges is that there tends to be high turnover because the operations typically rely on young journalists who use the organizations to gain professional experience and then move on to better funded or commercial firms.

The community and public affairs operations also exhibit widely disparate size and quality in their journalistic activities. Even most affiliates of National Public Radio—which is generally considered the most successful of non-commercial news operations—tend to have small and relatively undistinguished news operations. Most rely upon the exceptional content of the national organization, large metropolitan affiliates, and the best of the content collectively produced by other local affiliates. Affiliates with larger news staffs and quality tend to be limited to those linked to university journalism programs or in the best-funded metropolitan operations.

The challenges faced in these organizations should not deter the establishment of new online initiatives or keep the rest of us from supporting them. We need to be realistic about their potential, however. In the foreseeable future these startups will tend to supplement rather than to replace traditional news organizations. They may be part of the solution to the problem of news provision, but they alone are not the remedy.

Monday, 10 August 2009


Success in businesses is not the result of highly mysterious factors.

To be successful an enterprise must offer a product or service that people want; it must provide it with better quality and service than other providers—or at a lower price than competitors; it must change with the times and demand; and it must never forget to focus on customer needs rather than its own. And a limited number of competitors helps. Duh.

Many journalists have trouble understanding these principles, however, and we were treated to 2 classic stories in which journalists breathlessly announced this discovery over the weekend.

The New York Times told us about the “resurgent” Seattle Times. The Times is starting to reap the fruits of monopoly caused by the demise of the print edition of the Post-Intelligencer and the stabilizing economy. It has picked up most of the print readers from the P-I, raised its circulation prices, and been able to keep the higher ad rates that were charged when ads were put in both papers.

The Associated Press told us “Small is beautiful” and that local papers do not feel competition for big players like CNN, metropolitan television, and Craigslist because they focus on local news and advertising not available elsewhere. “Less competition means the print editions and Web sites of smaller newspapers remain the focal points for finding out what's happening in their coverage areas.”

Journalists are also starting to discover that the industry might not be as dead as they have been portraying it to be. A number of stories have reported that the drop in advertising due to the recession appears to be near bottom, that profits and share prices are rising, and there is no wholesale rush to the web by print newspaper readers.

These “surprises” are developing, I believe, because journalists have never covered their own industry with the same interest and vigor that they have covered other industries. This is partly true because they have adamantly and publicly expressed distain for the business side of the news industry and because they tend to accept and endlessly repeat the views of publishers without critical fact checking or seeking better understanding of the business dynamics of news. Whatever happened to the old journalism adage "If your mother says she loves you, check it out!"

Perhaps they will learn.

Saturday, 8 August 2009

Pinhookers' Bloodbath

The Saratoga yearling sale starts Monday, and the big Keeneland sale, which determines the fate of a large number of thoroughbred breeders, is barely a month away. For the past two decades, an important factor in those yearling sales, has been the activity of "pinhookers," seeking to buy yearlings for resale. The July issue of the Blood-Horse Market Watch, a pricy industry newsletter, contains what is, to me at least, a shocking but unsurprising report detailing the economic disaster that has befallen pinhookers this year. If one needed any more proof that our industry is going through a major restructuring, this is surely the smoking gun.

Pinhookers (see a definition here) in the thoroughbred industry buy yearlings at the summer and fall sales, then try to sell the horses as two-year-olds, especially at the so-called "select" two-year-old sales (Fasig-Tipton Calder in February, Ocala Breeders Sales Co. in February and March, Barrett's in California in March, and Keeneland in April). A smaller part of pinhookers' business is buying weanlings, then reselling them as yearlings or two-year-olds. In the past two decades, their business has boomed. According to Market Watch, profit rates for pinhookers at the select sales (the price they received for selling two-year-olds less the cost of their yearling purchases and maintenance and training expenses) ranged from roughly 30% per year to as much as 90%, the latter in 2004; for the most recent years, the profit rate was 28% in 2007 and 38% in 2008. In contrast to these healthy numbers, Market Watch calculates that this year, pinhookers in the aggregate actually lost 0.2%at the select sales, the first net loss they've ever recorded.

And that figure is based only on the horses that the pinhookers managed to sell this year. It doesn't take into account the losses that they suffered on horses that didn't sell at the two-year-old sales, nor does it account for the interest that they have to pay on the working capital loans most of them take out each year to provide money for buying new stock, nor the cost of their substantial investment in land and facilities near Ocala, where most pinhookers have their base of operations. So the real loss is much, much larger than that 0.2% figure.

Using Market Watch's methodology -- the pinhooker's cost is set at what he/she paid for the yearling, and a conservative $18,000 is added for the cost of getting the horse to the two-year-old sale -- some prominent pinhookers appeared to suffer staggering losses on their 2008-2009 ventures. All these people are hard-working, honest horsemen, who do an important job in the industry. It truly makes me sad to see some of these numbers. For example, Market Watch reports that Nick DeMeric (perhaps not so incidentally, one of the nicest and most trustworthy people in the business) lost almost $2.4 million on the 42 horses he sold at the five select sales this year. (Nick also had another 14 listed as not sold). Other important pinhookers with major reported losses include Niall Brennan (loss of $1 million on 55 sold, with another 37 not sold), Jim Crupi (loss of $1 million on 36 sold; another 29 not sold), Ciaran Dunne's Wavertree Stables (loss of $1.5 million), Robert Scanlon (loss of $969,000), Paul Sharp (loss of $630,000) and Eddie Woods (loss of 1.5 million).

Among the few major pinhookers to have recorded significant profits were Hoby Kight ($386,000) and Leprechaun Racing ($303,000). Interestingly, the two women who are major players in what has largely been a man's game -- Murray Smith and Becky Thomas (Sequel Bloodstock) -- were both reported as more or less breaking even, which is a major achievement in this year's market

The Market Watch figures don't reflect any pinhooker's overall financial state; there's just too much we don't know. Were they able to sell any horses privately, and for how much? Were their yearling purchases financed by other investors, who would then have taken much of the loss? Are they using their own money, or bank loans on which they have to pay (probably high) interest rates?

Despite the reported losses, it's already clear that the pinhookers as a group are still in the yearling market. In the first major yearling sale of 2009, the Fasig-Tipton July sale in Lexington, Kentucky, I was able to identify at least 55 purchases by pinhookers, or by agents whom I know to work primarily for pinhookers. And virtually all the major players were there, with Nick DeMeric, Jim Crupi, and Mike Ryan (who purchases for Niall Brennan) all making several buys. There were probably many additional horses sold that will end up being pinhooked, as purchasers often send their yearlings to pinhookers for breaking and training, and then on to the sales for the horses that develop quickly.

The Saratoga Select Sale catalog is attractive, the auction company has made a major effort to attarct foreign buyers, and there seem to be a lot of potential bidders out on the newly remodeled grounds of Fasig-Tipton in Saratoga, but it's way too early to tell if pinhookers' financial woes will impact this yearling sale. And the really imprtant test will be the Keeneland September sale. That's when more than 5,000 yearlings, some 15% of the entire US foal crop, are offered for sale. If the major pinhookers don't have the money available to be an important part of that market, breeders will feel the economic pinch even more than they already have.

The pinhookers' plight mirrors that of the industry as a whole. We're breeding too many horses and running too many races. When companies in other industries have overproduction, they cut back, sometimes drastically. But it's hard for the racing industry to lay off 20% of its workforce -- the horses -- and harder still to make the 40-50% cuts that are probably needed to restore economic health to the survivors.

In a substantially smaller industry, there would still be a niche for pinhookers. But, like the rest of racing, that niche would be smaller, and it wouldn't have room for everyone who's a pinhooker today. Perhaps the disastrous 2009 season will encourage some to consider other career possibilities. I'd hate to see another year or two of the trends I've described above truly ruin some fine people.

Sunday, 2 August 2009

Some Single-Payer Ideas for Racing

President Obama and the Congressional Democrats may have backed off the single-payer concept for health care, but that doesn't mean it's a bad idea. In fact, the single-payer concept could be very useful indeed in a restructured racing industry. In particular, the single-payer concept would work well in three different parts of the racing game: (1) simulcasting; (2) workers' compensation insurance, and (3) health care for backstretch workers. Let's take a look at how this might work.

First, a quick definition of single-payer systems. It's just what it sounds like: one entity pays all the costs (and sometimes provides all the services) in a defined economic area. In the US, the great successful example is Medicare. For those of us 65 and over, it's a wonderfully simple system: you go to the doctor or hospital, the government pays the bill, minus a very small deductible. Most other industrial countries use the same approach to health care for their whole populations. Not only is it cheaper (no bloated administrative costs for insurance companies, much of which is spent on advertising or on trying to deny coverage), but the results seem to be better as well; the US ranks at or near the bottom on most international health measures.

So how could the single-payer concept work in racing? Let's look at the three possibilities.


First, we can all agree that racing's simulcasting system is a mess. Different bet-taking companies make separate deals with different tracks, and conflicts between the tracks, the horsemen and the off-track betting outlets are legion. For their part, bettors have to go to multiple platforms to bet the races they're interested in, subscribe to multiple cable or satellite TV feeds (TVG, HRTV, etc.), and generally navigate a very unfriendly web environment. This was one of the best racing weekends of the summer, with the Haskell, Jim Dandy and West Virginia Derby, yet there was no national television coverage, and no simple way for the average racing fan easily to see and bet on all the races. The fact that Rachel Alexandra's dominating Haskell win (if she wins the Travers as well, shouldn't she get the Eclipse Award as champion three-year-old colt?) was an incredibly stupid waste of an opportunity to build a racing fan base. I don't care if the NTRA is broke; this was one weekend for which they should have held a bake sale to get the races on national TV.

My Thoroughbred Bloggers' Alliance colleague Patrick Patten recently posted an idea for a single-entity company that would handle all of racing's simulcasting. Definitely worth reading in full. Basically, Patrick's plan would have a single platform, jointly owned by the tracks, that would both buy and sell all the individual signals. As envisioned in Patrick's post, all tracks would get together and form a company that would have the exclusive right to buy all the simulcast signals and then would in turn sell those signals, both to other tracks and to off-site bet takers such as OTBs, casinos, dog tracks, jai alai frontons and internet racing sites.

The simulcast company would need to fall under some sort of antitrust exemption, since it would involve cooperation by tracks that would otherwise be seen as competitors. While the National Football League is currently pursuing a Supreme Court case that might extend antitrust immunity broadly in the sports business (currently, only baseball has complete immunity), my own reading of the law is that it wouldn't be so easy, under racing's current fragmented ownership structure, for a racing simulcast company to qualify for the exemption so as to exercise the needed monopoly power. [You can take that legal opinion for what it's worth; I'm a tax and trusts and estates lawyer and don't practice in the antitrust field.] But if racing were actually organized into a formal league structure, as I suggested a couple of weeks ago, then the legal case is much stronger. In a league structure, the individual teams (or race tracks) are all parts of one entity, and that entity can set the rules for broadcasting its events. A closer parallel to racing than the NFL might be NASCAR, which operates as a unitary entity even though the individual tracks have different ownership. The cars and drivers in NASCAR compete in various divisions, or classes. Sounds a lot like the different Eclipse Award or Breeders Cup categories.

Presumably, one effect of channeling all simulcasts through a central entity would be to smooth out differences in takeout, and in the fees paid and received by betting outlets and tracks. If so, there could at least be a mechanism for reducing takeout, which ought to be good for betting handle growth, while at the same time guaranteeing a fairer share of simulcast betting revenue to the horsemen who put on the show. My own preference would be for such an entity to be owned not just by the race tracks, but also, or alternatively, by owners and trainers. A jointly owned and managed simulcasting entity would be far better than the current mess in which both racing fans and horsemen are ill-served.

Workers' Compensation

Some seven years ago, Price Fishback and Samuel Allen of the University of Arizona Economics Department accurately pointed out that horse racing had a workers' compensation crisis. The cost of providing workers comp coverage for trainers' employees had gotten too high for most trainers to afford, and differences between states made it difficult or impossible for trainers to move their horses from one track to another without incurring crippling premium costs. Their conclusions were adopted by the National Horsemen's Benevolent and Protective association (HBPA) in a report, also drafted by Allen, in 2003.

Seven years later, that crisis is still with us. Trainers are being forced out of business by the high cost of workers comp. Steve Standridge, among the leading trainers at Calder, was forced out for a while because his insurance carrier canceled his policy. And the cost of insurance continues to go up. My own trainer has been forced to add a separate item to his monthly bill for the cost of insurance, and trainers who try to incorporate that cost in their day rate find that their owners complain about ever-higher costs.

The only states that have some sort of solutions to the problem are Delaware and California, where there are state-wide policies covering all backstretch workers, rather than each trainer having to get his or her own policy, and New York, Delaware and New Jersey, where jockeys (and, in New York, exercise riders) are covered under a separate fund and so not included in a trainer's obligations. None of these solutions are cheap, though. The jockey/exercise rider coverage in New York is financed by a 0.75% deduction from every purse (a couple of hundred dollars from a typical allowance win purse); over the course of a year that's not an insignificant amount, and it still leaves the trainers liable for covering grooms and hot walkers.

So what's the solution?

The recommendations of those old reports referred to above are still perfectly workable: (1) a "captive" insurance company, owned by horsemen, that would qualify to offer workers comp insurance in all the major racing states, or (2) a federal program, with the US government as the "single payer," that would offer workers comp contracts that crossed state lines and that would be required to be honored by the various states. But, since even a government option, along the lines of Medicare, to offer health insurance for all Americans seems to generate considerable know-nothing opposition in Washington, one shouldn't hold out all that much hope for a federal solution. That leaves it up to us, horse owners and trainers, to do it ourselves and set up our own insurance company.

Backstretch Health Care

[Disclosure: I'm a member of the Board of Directors of the Backstretch Employees' Service Team (BEST), the health and counseling program for backstretch workers at NYRA tracks, as is my wife -- I'm appointed by the NY Thoroughbred Horsemen's Association and she's appointed by NYRA, so I guess that proves the two organizations can work together.]

The grooms, hotwalkers, assistants and night watchmen who care for thoroughbred race horses are among the lowest paid and least protected full-time employees in the country. Most trainers can't afford to offer their employees health coverage, and most backstretch workers can't -- or are afraid to, because of their immigration status -- qualify for free care, through Medicaid or similar programs.

Now, if we had true national health care -- the single-payer system that most other countries have that simply covers everyone -- then there wouldn't be an issue. But we live in America, not in Utopia, nor even in what passes for the rest of the civilized world. So, even if some sort of health care bill emerges from Congress, it's likely that coverage will not be truly mandatory for the smallest of small businesses -- like most thoroughbred trainers. The current version of the House bill, for example, does provide a tax credit for small businesses that do provide health care to their workers and allows small employers to join in larger insurance pools, rather than purchasing separate policies. In addition, the bill would exempt employers of 25 or fewer workers -- which would probably include 90% or more of thoroughbred trainers -- from its "pay or play" fees, thus permitting these small employers not to offer coverage.

Todd Pletcher or Steve Asmussen could afford health coverage for all their employees (Asmussen could probably get a good start toward paying for the policy with what he earned in 10 minutes on Saturday afternoon). But most trainers can't. It might well cost them $10,000 for health insurance for a worker whom they're paying $15,000-$20,000 a year. The economics just won't work. So the solution has to be some sort of collective action.

The NYRA/NYTHA/BEST model is by no means perfect. It covers only the people who actually work at the track, not their families, and it is subject to fairly low limits on total coverage. Not so long ago, the amount contributed to backstretch health by NYRA was enough to cover trainers, their assistants, backstretch workers and their families. Now, with NYRA's contributions continuing at their historic level, and with NYTHA (out of the owners' purse money) adding another $500,000 a year there's barely enough to cover just the grooms and hotwalkers. But it's still better than the situation at most other tracks, where workers have no health coverage at all.

Here's how the New York plan works: because backstretch workers are not employed by the track, but by individual trainers, NYRA can't just set up an employee health care plan the way most employers would. Instead, it's created an independent organization, BEST, which is a 501(c)(3) charity and which in turn has established a fund which in tax and labor law terms is "voluntary employee benefit association," or VEBA, that actually pays the health care costs. As it has evolved in New York, BEST operates an on-track health clinic and the VEBA pays for off-track doctor, lab and hospital costs, acting as a self-insurer, mostly because no insurance company is particularly interested in providing coverage for a low-wage group like backstretch workers.

As I said, the New York model is by no means ideal; we'd love to be able to cover families, as well as those trainers and their assistants who can't afford individual coverage, and we wish the limits on benefits were higher. But at least it's something.

The model could easily be extended to tracks across the country, and could be financed with matching funds from the tracks and the horsemen, plus the aggressive pursuit of federal, state and chaitable grants. With all the money being raised these days for thoroughbred retirement, one might hope that there could be a bit raised as well to care for the people who care for our horses.

Are these solutions to simulcasting, workers comp and health care easy? Of course not. Are they possible? Yes. With a little effort (well, with lots of effort) and with a willingness to submerge or individual or corporate selfish interests for the greater good of the sport that we love, we can overcome.