Wednesday, 22 December 2010

FCC Moves to Halt Internet Service Provider Content Discrimination and Preferences

The Federal Communications Commission has moved to keep Internet service providers from limiting or unreasonably discriminating against content provided by competing services

The regulations are designed to keep telephone and cable companies that provide phone services from using their Internet services to limit use of Skype and other online telephone services. It is also intended to halt them from making content provided by audio and video service providers they do not own less desirable by limiting downloads from firms such as Netflix or Hulu or providing faster service only for their own content.

The rules are designed to maintain a level competitive position on the Internet and to restrict the abilities of companies that dominate access to the Internet from using oligopolistic control of the service points to harm content competitors.

The regulations require that services allow their customers equal access to all online content and services, but allow the services some flexibility to management network congestion and spam as long as the rules are clear and not anti-competitive.

The rules apply to fixed line services, but do not apply equally to wireless telephony which is becoming the primary means of Internet access though smart phones and electronic tablets and e-reader. Mobile phone providers are permitted to provide preferential access to their services or selected partners, but the rules forbid mobile providers from blocking access to competing sites and services. Mobile services are given more leeway to manage their networks because capacity is more limited than on the Internet.

The regulations are an important step in ensuring that major service providers such as Comcast and Verizon are not allowed to use their dominance in service provision to harm other companies and the FCC should be applauded for its efforts. Such companies have in the past shown their willingness to take advantage of their monopoloy power and are not widely noted for their consumer friendliness.

Major service providers and Republicans are vowing to fight the move, arguing that the FCC does not have the authority to issue such regulations. If the courts side with them on the issue, Congress should explicitly give it the authority or empower the Federal Trade Commission to ensure competivieneess online.

Thursday, 2 December 2010

Content Farms and the Exploitation of Information

A growing number of firms are aggressively pursuing the market for information by providing material that answers online searches and employing strategies so their material appears high in search results.

These enterprises are providing high quantity, low quality material on topics designed to produce many search hits and driven by the desire to make money from advertising received as high traffic sites. Some are proving quite successful.

Demand Media, for example, uses about 13,000 freelance writers to produce about 4000 articles a day for which it gains about 95 million unique visitors with more than 620 million page views monthly. Its eHow.com site alone gets about 50 million users. Ask.com, Yahoo and AOL are also engaging in the market.

When you make a search and are taken to answer.com, dictionary.com, wikianswers.com or hundreds of other sites providing such information to the public, you encounter this mass produced content. The business strategy is working and many of the sites are among the top 25 sites in the U.S.

These producers and a whole range of similar organizations are producing material in content farms that rely on freelancers who are paid as little as $1 an article or get no payment except for number of page views for their specific work. It is a throwback to the penny-a-word days of journalism in the 19th century. The firms are increasingly seeking video producers, photographers, and graphic artists to provide similar material at similar levels of compensation.

Even established news organizations and other enterprises are starting to use the syndicated material produced by such content farms. Organizations such as Hearst publications and National Football League are relying on them for some content that appears on their sites, for example.

The implications of these developments on the quality of Internet information and the prospects for professional writers are clear and hardly encouraging.

Tuesday, 16 November 2010

The Ever Less Durable Race Horse

Very comprehensive article by Bill Finley in the Thoroughbred Daily News Magazine today with much detail about what we already know. The modern thoroughbred, at least in the US, runs less often each year, and far less often over a career, than race horses did half a century, or even a generation, ago.

The statistics, many from the Jockey Club Fact Book, are absolutely clear. In 1950, the 22,388 horses that raced averaged 10.9 starts for the year; in 2009, that average was 6.23 starts, a decline of 43%. In the same period, the number of races run has doubled, from 26,932 in 1950 to 54,121 last year, and the number of thoroughbreds that actually started at least one race during the year has increased by 220%, from 22,388 to 71,662.

As I and many others have said before, that's too many horses and too many races. Even with the huge increase in the foal crop over the years (now beginning, at last, to shrink), average field size has actually decreased since 1950, from 9.07 starters per race to 8.27 last year, a decrease of 9%.

And the number of starts that a horse makes in its career also continues to decline, to somewhere in the mid-teens. Clearly, horses today don't run as often or for as long. Finley's article raises some possible reasons.

The first possibility, which one often hears around the backstretch is that "we're not breeding as tough a horse as we used to." That's correct to some degree, but not in the sense that equine genetics have somehow changed over the past half-century. Evolution doesn't happen that fast. Horses have been around for thousands of years, and thoroughbreds have been around for hundreds of years. It's not that thoroughbred genetics are suddenly falling apart, but rather that the particular thoroughbreds being bred, and hence their descendants that are populating North American race tracks, are being systematically selected for a combination of precociousness, speed and, as part of the package, a lack of durability. Since the explosion of the bloodstock market in the 1970s and 1980s made it more profitable to breed than to race, and since the emergence of Mr. Prospector as the dominant sales stallion, the particular gene combinations embodied in North American race horses have indeed changed, and we see the results breaking down on the track every day.

This tendency is exaggerated by the rush to stud of stallions that didn't even have double-digit numbers of races before they were retired to cash in at the breeding shed. Take, for example, some of the new stallions for 2011. As Jeff Scott points out in today's Saratogian, the top two stallions for next year, Blame and Quality Road, each have only 13 lifetime starts, and Quality Road showed both distance limitations and temperament problems during that brief racing career. Good luck with his colts in the classics. As for some other stallions-to-be, Wood Memorial winner Eskendereya, sprint sensation Majesticperfection, and Iowa Derby winner Concord Point each "retire" after exactly six lifetime starts, while Travers winner Afleet Express is the grand old man of three-year-old retirees, with seven starts.I guess the theory, even in a down market, is breed 'em to 150-200 mares a year, rake in the money for three years, until someone notices how their progeny are actually doing, then ship them off to Japan, Korea, China, Turkey, etc.

Speaking of shipping, we've been exporting many more thoroughbreds from the US than we've been importing for many years. Last year, more than 3,000 horses were exported, while fewer than 1,000 were imported. And the flow has been systematically skewed, with longer-distance pedigrees leaving, until the point has been reached that there are hardly any true distance sires remaining in the US. That's reflected in the paucity of distance races at US tracks as compared to, well, anywhere.

But even taking into account the shift in breeding patterns, there are other factors that affect race horses' durability and frequency of running. The use of Lasix and other drugs is justified by vets and trainers who say that horses need it to race. If that were true, why are horses running so much less frequently now that they're all on Lasix? For a start, Lasix causes a horse to lose something like 30 pounds of fluids, and it takes several weeks for the horse to regain that weight. And, in place of the half-century old cure for aches and pains and bleeding -- giving the horse time off -- trainers now use Lasix and other drugs to squeeze as many starts as they can out of a horse before it falls apart completely.

A third reason for fewer starts per horse, at least according to Finley, is trainers' focus on keeping their win percentage up. The old practice of racing a horse into shape might have worked when owners' attention spans lasted the length of a horse's career, rather than just to the next race. But today, trainers don't want to run unless they have a good shot at finishing in the money and keeping their numbers up. If one trainer doesn't do that, he or she will very soon lose business to someone who does, and who, as a result, has better numbers. So horses sit in the barn until just the right race comes up.

Some of these problems are pretty intractable. Many of the newer owners in the game want results, and they want them now. (I'm not immune to this myself; anyone running a racing partnership knows that keeping the partners happy with wins and in-the-money finishes in very very important.)

But some of the trends can be reversed. Fewer foals. Fewer races. A ban on raceday medication, like that in most of the rest of the world, introduced over time to allow breeders and buyers to adjust to the new requirements, might well shift breeding patterns to emphasize toughness. Purse subsidies skewed to longer-distance races might make some distance stallions viable. All these changes would take time to percolate through the system that's evolved over the past half-century, but they could result in the return of the tough, durable horses of yesteryear.

Sunday, 7 November 2010

Errors of Omission

In more chivalrous times, or at least so one would like to think, those in positions of power and authority who did wrong would offer their resignations, or, in Japan at least, their lives, as tokens of atonement. If that grand old tradition were still in vogue, here's a list of those who should, as of Monday morning, be without a job:

Churchill Downs CEO Bob Evans and track president Kevin Flannery, for not exercising their authority to bar local favorite Calvin Borel from the premises after his outrageous brawling Friday afternoon.

Chief Steward John Veitch for letting Borel off with a $5,000 slap on the wrist and, more importantly, for failing to protect the bettors' interests in the Ladies Classic by scratching Life at Ten, declaring her a non-starter, or having her run for purse money only.

Track Superintendent Ray Lehr, for letting the BC turf races be run on a course that many jockeys said was less than ideal and that may have led to the death of Rough Sailing, whose feet went out from under him in the clubhouse turn of the Juvenile Turf and who later was put down because of a broken right humerus (the long bone in the upper part of the foreleg).

And, last, but by no means least, BC President Greg Avioli, his general counsel and his high-profile Lexington KY law firm, for failing to negotiate a television contract with ABC/ESPN that would have prevented the ludicrous gap in national TV coverage at 3:30, when ESPN continued to show a football game as coverage was supposed to switch from ABC.

These are the biggest two days in North American racing, and they were run by folks who appeared not to know what they were doing. Just step aside, guys; replacements couldn't do any worse.

Let's take the issues one at a time.

First, Calvin Borel. His conduct in the paddock after the BC Marathon was completely out of control. (Story and revealing video here.)Fighting like that would get you a red card in soccer, the heave-ho in baseball, ejection from the game in football or basketball, and, well, OK, a five-minute major penalty, maybe, in hockey. And it should have resulted in Borel's being thrown out of the ball game -- the Breeders Cup -- as well. Trainer John Sadler, whose filly Tell a Kelly was the fourth choice in the Juvenile Fillies and which finished a lackluster 7th with Borel aboard, had no hesitation in telling the TV audience he wished he'd been able to change jockeys, so it probably wouldn't have been much, if any, of a disadvantage to require new riders on the horses that Borel had been named on. In his four Breeders Cup rides after the fight, Borel finished 7th, 9th, 10th and 9th, so it's not as if any of the many other talented riders available at Churchill this weekend would have done worse.

Perhaps the stewards were constrained by the requirements of due process; they would have had to give Borel and hearing, and perhaps allow for an appeal before applying any penalty. (in the event, they didn't even try to do that after the fact, getting Borel to waive his rights to a hearing and settle for a $5,000 fine, an amount that, for an athlete at his level, is trivial.)

But Churchill Downs management had no such limitations. As another Churchill Downs Inc. track, Calder, showed back in 2006, track management has an absolute right to bar anyone from the premises for any reason at all, or for no reason. When track management finds a convicted illegal gambler on the premises, track security escorts him to the gate and makes sure he's not allowed in. Borel's flouting of the ordinary rules of sportsmanship and civility, notwithstanding the purported apology so obviously drafted by his wife, Lisa, should have earned him no better treatment.

By the way, Javier Castellano, who clearly did start the chain of events by moving his horse to the right without bothering to notice that there was another horse in the way, also waived his right to a hearing and settled for a six-day suspension for careless riding and a $2,500 fine for his part in the brawl, which, as far as I could see, consisted of trying to get away from the crazed Borel.

Moving right along -- we'll ignore the incident when the starting gate crew couldn't figure out which stall in the gate to start with and ended up with one horse left over -- we come to Friday's finale, the Ladies Classic. ESPN was all over this story, with Jerry Bailey noticing problems with Life at Ten as the filly was warming up, and asking John Velazquez about the situation as John was out on the track before the race. ESPN's Randy Moss said later that ESPN had passed along the comments to the stewards before the race. Given that, whether Velazquez said anything to the track vets is immaterial.

A jockey's responsibility in a situation like that is to protect his horse, himself, and the other jockeys and horses in a race. It's not the jockey's job to worry about the betting public. The same is true for a trainer. That's why we have stewards; it's their job to take the interests of the bettors into account, and to protect those bettors from, among other things, the distorting effects of information being available to some, but not all, of the public. In the Ladies Classic, the total handle on the race (excluding the Pick 6 pool, which had already been made moot by longshots in prior races) was about $10.7 million. Since Life at Ten went off at odds of 3.8-1, that implies that she accounted for about 17% of all bets on the race (after taking the takeout rate into account). In other words, roughly $1.8 million was bet on a horse that, as anyone watching ESPN before the race knew, had absolutely no chance. Or, to put it another way, the stewards' failure to act on the information available to them stole $1.8 million from the betting public. Bank robbers who take that much tend to be put away for a very long time indeed.

And it's not as if chief steward John Veitch and his crew didn't have options. They have the authority to order a scratch, or they could have had Life at Ten run for purse money only, with all bets on her refunded. Even after the race, they probably had the authority to have Life at Ten declared a non-starter, again resulting in a refund. Ah, but that would have cost $1.8 million in handle, and we certainly wouldn't want that, would we?

On to Saturday.

Before the Juvenile Turf, we had already heard several comments on the television coverage regarding the state of the Churchill turf course, mostly to the effect that it was very firm underneath, but "pulling away," or words to that effect, on top. Watching the replay of Rough Sailing's fall, it looks exactly like the kind of accident that would occur if the turf surface pulled away as the horse's feet hit the ground. Rough Sailing's left rear just went sideways, toward the outside rail; jockey Rosie Napravnik was lucky to be thrown clear, rather than landing under the horse, and lucky that her horse was toward the outside and toward the rear of the pack, so the following horses didn't fall over her. At least one account of the race said Rough Sailing fell after hitting a "soft spot" in the turf course.

Could it have been just an unlucky accident, with no fault attributable to the turf course? Sure. The horse was going into a turn, and not all horses, especially not lightly raced two-year-olds, necessarily know how to navigate the turns. But where we'd already heard worries about the condition of the turf course, I'd like to see some sort of an investigation that would see if Lehr and his crew had really done all they could to make the course as safe as it should have been for racing's biggest day.

And, finally, on the to embarrassment of losing the national TV feed for 15-20 minutes. The Breeders Cup had already agreed to a silly split-network approach for Saturday, with the first two hours being shown on ABC and the rest scheduled for the main ESPN channel. That's dumb enough to begin with; why make viewers work to change channels and stick with the show? We all know from behavioral economics research that the default option -- in this case, not even bothering to hit the remote control button -- always has its adherents, so it was likely that the BC would lose some viewers with the channel switch even if all had gone well. but, when the appointed hour came, those of us with sufficient motivation to change the channel were greeted with -- football. Michigan and Illinois were seemingly incapable of beating each other, and college football seems to have dispensed with the idea of a tie, so the teams were battling on into a third overtime, still on camera. At some point before the gates opened for the next BC race, at 3:56 pm, the BC was back on ESPN, but one has to think that considerable damage had been done. For some non-negligible number of casual viewers, the combination of having to change channels and then finding the wrong sport when they did change would have been enough to divert them from racing for the rest of the day. Hell of a way to encourage new fans.

Just as it's unfair to blame John Velazquez or Todd Pletcher for the Life at Ten debacle, it's unfair to blame ESPN for the TV interruption. The network's job is to maximize ratings, and I'm sure that sticking with Michigan-Illinois did just that. It was the Breeders Cup management's job to get a TV contract that guaranteed continuous coverage -- preferably on the same channel. They failed, miserably.

I'm teaching a law school course this semester on drafting contracts. One of the things my students, 10 weeks into the semester, already know is how important it is to think through all the contingencies, the what-ifs, that might arise, and to provide for them in the contract. Now, BC President and CEO Greg Avioli has a law degree from a pretty good school (the University of North Carolina), and has actually been a lawyer involved in racing, as general counsel to the National Thoroughbred Racing Association (NTRA). So I have to assume that he knows how to read a contract. But apparently, neither Avioli nor any BC in-house or out-house lawyer thought to cover the perfectly predictable contingency of another event running late on ESPN.

The solution isn't rocket science. ESPN could have shifted the BC to another of its many channels, or it could have shifted the balance of the football game, or ABC could have stayed with the racing coverage until ESPN was available. The point is that it was the Breeders Cup's responsibility to make sure one of those things happened, by providing for it in the TV contract. If you can't do as well as my third-year law students, you shouldn't be drawing down $507,000 a year as head of the BC.

In between the screw-ups, by the way, there was some pretty good racing. Just seems like a hell of a way to run a railroad.

Thursday, 14 October 2010

Digital Media Require New Pricing Methods

Newspaper publishers need to explore new methods of pricing content as they expand their digital portfolios because merely transferring the methods used in print can never bring the success publishers desire.

Print newspaper publishers have traditionally tended to set prices based on production and distribution costs and not on value created. Unfortunately, this has made it impossible to possible to obtain a price premium for factors such as prestige, service, experience, and convenience.

New digital operations, however, provide significant other pricing options because they differ in terms of whether they maintain the existing content bundle, whether non-payers can be excluded from use, the types of experience they deliver and how they are used.

Digital media require significant new thinking because they tend to be joint and complementary products with print. These lend themselves to selling strategies of bundling and versioning that permit uses of bundle pricing, option pricing, multiple purchase pricing, differential access pricing, and inventory based pricing that have not typically been used in the newspaper industry.

Pricing is particularly complex in the digital environment because the number of price choices grow exponentially. In the print product managers price advertising and the circulation, but when they add an online product they have to make 8 choices because they are shifting to a multisided platform operation. If mobile, social media and other print products are added to the portfolio, one must give significant thought to the roles each plays in the portfolio and the interactions of pricing choices among them.

Although digital media use is growing significantly, companies need to be pragmatic in their investments and operations and their hopes for new revenue. Online consumption is still only about 10 percent of all media use and online advertising is still only about 13% of offline advertising. Those numbers are significant and rising so companies needs to seek and exploit opportunities in digital spaces, but managers cannot expect those to immediately replace the contributions of their legacy operations.

Monday, 4 October 2010

Newspaper Companies Start to Think Beyond Today's Bills

The somewhat improving condition of the newspaper industry is permitting companies to move from merely paying operating expenses to finding ways to improve their balance sheets and looking for new opportunities. In recent weeks:
  • The Gannett Co. has placed senior notes totally $500 million that will be due in 2015 and 2018. The notes financed at 6.375% and 7.125% will give the company some financial breathing space by being used to pay a maturing loan and revolving credits. In addition it negotiated an extension on $2.7 billion in revolving credit with Bank of America from 2012 to 2014.
  • The New York Times Co. has cut its debt by 40 percent in past 2 years and is beginning to look at small investments in digital media that may position it for future growth. It recently provided $4 million in financing for Ongo, a start-up news sharing site that will aggregate stories from a number of newspapers.
  • The Washington Post Co. announced it would repurchase 750,000 of its outstanding shares. Such a move will increase future earnings per outstanding share and boost shareholder equity in a tax beneficial way. This type of buyback typically occurs when cash is accumulating in the company and its stock is undervalued.
All of these developments reflected the improving financial performance of newspaper companies and indications that the revenue picture for newspapers is getting better. With improved profits and dividend payments, newspaper companies, lenders, and investors are starting to step back from the brink and the reconsider the completely negative picture of newspapers that developed 3 years ago.

Friday, 17 September 2010

Keeneland -- The View from the Trenches

For the past few years, I've been lucky enough to work as part of the EQB buying team at the Keeneland September yearling sale. EQB, run by my friends Jeff Seder and Patti Miller, has one of the best records in the business for picking out a high percentage of stakes-quality horses at reasonable (whatever that means in the horse market) prices. Everyone can find the million-dollar horse at a sale. But finding the $150,000 horse that's just as good requires a bit more skill.

EQB certainly has the credentials. Among its recent purchases, are Ahmed Zayat's Eskendereya, Zensational, Mushka and J Be K; George Strawbridge's Eclipse Award winners Forever Together and Informed Decision; Ken Ramsey's General Quarters; Bruce Lunsford's Madcap Escapade; and Bill Heiligbrodt's Lady Tak.

This year, EQB is not buying for Zayat, but has a new client, someone who's been in racing for years but is now looking for his Kentucky Derby horse. He's given us a pretty big bankroll to work with, but wants it spent wisely -- no Green Monkeys or Seattle Dancers.

So, how do you find the $200,000 -- or even $50,000 -- Derby horse?

First, by trying to work harder than anyone else. We're probably the only group that actually looks at every horse offered in Books 1 through 4 of the sale. That's 3,185 horses in the catalog, maybe a few less than 3,000 after scratches. To look at that many, and pick out the good ones, requires a fair bit of work, and a fair bit of organization. Besides Patti and Jeff, the EQB team includes two spotters, who do the first looks at every horse and produce short lists for Patti to check, someone to hold the horses in the stall when Patti does ultrasounds of their hearts, a vet to review the records in the repository and scope horses, the invaluable Angie to run the computer analyses of the heart scans and to integrate all the data, and me, to coordinate what everyone's doing and to try to keep everyone sane in the chaos of the sale.

Horses in the sale are spread out over 49 barns, and a lot of success depends on just making sure that someone goes to every one of those barns. We start every morning by dividing the barns up between the spotters, then Patti and I start with second looks at horses identified the day before by the spotters, narrowing the lists down, looking for a racy, two-turn kind of horse, with a big stride and no obvious flaws. Sometimes we get help from those consignors that we trust to be honest and just point us in the direction of the horses that they know are serious candidates; some consignors, on the other hand, try to give us a "short list" that consists of everything in the barn.

The horses that survive these second looks go on the list for heart scans that same day. Somewhere between 2 and 4 pm, Patti gets started doing the rounds of the barns again, with "George," the ancient but still functional ultrasound machine. The scans are done somewhere around 9 or 10 pm, and then Angie stays up until early in the morning processing the data. Then it all starts all over again.

The next morning, the list is cut down further, after the vet reports on flaws that we just can't live with. Then we consult with client, get some guidelines for how much we can bid on those horses that are still on the list, and, in between looking at horses for the next day or two of the sale, run back to the sales pavilion to bid on today's list.

Eating is a challenge, especially since the consignors have gotten a lot less generous in putting out lunch at the barns. Pat Costello's Paramount still offers healthy sandwich wraps, and a couple of barns have pizza for the customers, but the lavish lunch spreads of days gone by are nowhere to be seen. Surviving on cookies and coffee is probably not to be recommended, but that's what's there when you get hungry.

Still, we've been doing pretty well so far, with 17 horses bought, for $3,070,000, over the first six days of the sale. That makes us the 3rd leading buyer to date, and the one among the top buyers with by far the lowest average (just over $180,000 per horse) price. So far, so good.

Now, on to Book 3.


Thursday, 2 September 2010

The State of New York Racing

First NYRA, now the Jockey Club. I'm beginning to wonder what's getting intop these pillars of the establishment when they start doing things right.

In NYRA's case, it was the comments by Chairman Steve Duncker and CEO Charlie Hayward on the need to reduce takeout. Now, as announced at the Jockey Club Round table two weeks ago, the Jockey Club has released statistical fact books on each of the major racing jurisdictions. Breaking down the data state-by-state makes it a lot easier to zero in on trends in the business and to make some predictions about where we're going.

Take New York, for instance. The New York Fact Book for 2010 -- data through the end of 2009 -- shows in stark detail how the industry has shrunk, back to a level of perhaps two decades ago.

Take as a starting point the number of New York mares bred each year. From a high of 2,749 in 2003, that number dropped to 1,599 in 2009, the lowest in at least 20 years, and, based on anecdotal evidence, I'm sure that it will turn out to be even lower in 2010. With a breeding rate that';s barely half the peak level of only a few years ago, that means there are a lot of farms going out of business and a lot of jobs being lost, probably forever, as the racing industry is certainly going to downsize on a permanent basis.

Similarly, the number of stallions based in New York has declined by two-thirds, from 236 in 1991 to only 81 last year. While the average New York stallion's book size has doubled, from 9.1 in 1991 to 19.7 in 2009, that still doesan't compensate for the loss of stallions and mares.

New York's foal crop was 1,684 in 2008, down from a peak of 2,024 in 2004. New York also appears to be losing ground vis-a-vis other states; its foal crop in 2008 accounted for 4.7% of the national total, compared to 5.4% just six years ago. That's a significant reduction in market share.

Increasingly, New York-based mares are being sent to out-of-state stallions. For the 2004 New York foal crop, roughly 65% were sired by stallions standing in the state, while for the 2008 crop, just over 50% had New York-based sires. The big shift was to Kentucky, whose stallions accounted for about 25% of the New York foal crop in 2004 but for 40% just four years later, in 2008.

Moving from breeding to racing, the news is similarly discouraging. Purses in New York reached a peak (in non-inflation-adjusted dollars) in 2005, at $154 million. Last year, they totaled $133 million, about a 15% decline. And the average purse per race, despite big increases by NYRA at Saratoga last year, dropped from $41,229 in 2005 to just $34,832 last year. That's the lowest level since 2000, even before taking inflation into account. And horse owners' costs have certainly increased since them; trainers' day rates are generally 20% higher than a decade ago, not even counting the increasing number of extra charges that trainers tack onto their bills these days.

Meanwhile, as we all are aware, the average number of starts per horse per year continues to decline. From 9.3 starts per horse in 1991, when Lasix was still illegal in New York, the number has dropped to just 6.9 last year, a decline of 26%. More evidence, if such is needed, that the use of Lasix does nothing to extend horses' racing careers. Similarly, the average number of lifetime starts per horse has dropped from 28 for foals born in 1991 to 18 or so for those born in 2003, who would have been six years old last year. Again, the decline correlates very well with the introduction of Lasix in New York.

Auction prices for NY-bred yearlings peaked in 2007, at an average of $38,116. Last year, that average dropped by nearly 30%, to $26,931. With Keeneland and Timonium sales still to go, it's too early to estimate the 2010 number, but the average at last month's Saratoga Fasig-Tipton NY-bred sale, which usually catalogs the cream of the New York crop, was down a couple of percent from 2009, so it's unlikely there will be any overall increase when all the numbers are in this year.

So, the evidence is in. The decline in racing generally hasn't spared New York, even though NYRA presents the best racing product in North America. And the endless dithering in Albany, taking nine years to approve a slot machine operator for Aqueduct, coupled with the follies of the bankrupt New York City OTB Corp., have surely made things worse. Painful as it may be, perhaps it's time to contemplate a more orderly downsizing of the industry in the state -- fewer racing dates, coupled with a better distribution system for the simulcast signal. At least that might provide some stability for those left in the business and allow them to do a little planning for the smaller future that we all face.

Sunday, 22 August 2010

NYRA Gets It Right

Spent the morning at the annual Jockey Club Round Table on Matters Pertaining to Racing, the annual get-together of the rich and famous organized by Dinny Phipps and Co. at the famed Gideon Putnam Hotel in Saratoga. Was definitely underdressed for the occasion -- Steve Crist and I seemed to be the only males not wearing ties -- but nonetheless picked up all sorts of interesting info, which will be grist for a series of upcoming blog posts.

But first, congratulations to New York Racing Association chairman Steve Duncker, who managed to include three really good points in his brief presentation.

First, Duncker ended his Power Point slide show with a sincere, and very prominent, "Thank You" to the owners and trainers who, by sending their best horses to race in New York, help maintain the state's position as the country's pre-eminent racing venue. (As an example, 36% of all the Grade 1 stakes races in the US are run at NYRA tracks.) Even for those who ofrten disagree with NYRA management, it's nice to be appreciated.

More substantively, Duncker pointed out that our product -- betting on horse racing, is grossly overpriced, and has been getting more expensive. From a blended takout rate of 15% a few decades ago, NYRA's takeout is now at a level of 19.8%. That's undoubtedly one of the factors causing the rankings of NYRA tracks by HANA, the Horseplayers' Association of North America, to be well below what would be suggested by the quality of New York racing. In those ratings, Saratoga ranks 16th of 69 rated tracks (Keeneland is rated No. 1), and Aqueduct and Belmont languish at 26th and 27th, respectively.

In contrast to the nearly 20% that NYRA charges the bettor, Duncker pointed out that the price of other forms of gambling is much cheaper. The "takeout" on craps averages 2%, on blackjack 3%, on slot machines, 6%, and on casino poker tournaments, 8%. No surprise that we're losing the business of the numerate younger generation.

Duncker acknowledged the problems with reducing takeout -- how to accommodate rebates for the "whales" who provide a large share of total handle, how to fairly split the pie among purses, track operators and off-track bet takers, etc. But even raising the issue in public represents a huge step forward, especiallly at the same time that California seems to be moving in the wrong direction with a major takeout increase.

Duncker's other really smart point was to analyze race track results by how much in handle is generated by each dollar of purse money. It's a great metric, one that I've used myself in looking at how the Saratoga and Monmouth meets compare, and one that would certainly be expected of a former Goldman Sachs partner, as Duncker is, but it's the first time I've heard this sort of rigorous quantitative analysis from a racetrack official. Just compare this approach to the blatherings of, say, Frank Stronach.

NYRA, unsurprisingly, is way ahead of the rest of US race tracks on this measure. Each dollar of purses at NYRA tracks, according to Duncker, generates $22 in total handle. That's twice as much or more than at any other track, and, with slot machine revenue finally in the foreseeable future in New York, augurs well for the continued viability of racing in New York. (According to data presented by Duncker at the Round Table, a "conservative" estimate of slots revenue from the Aqueduct racino would add $13,000 to the average overnight purse in New York. Who knows, it might even be possible to think about breaking even with a good horse.)

I'm sure there will be lots to disagree about in the future, but for now, Steve Duncker and NYRA seem to have gotten a few things right.

Saturday, 21 August 2010

Bankrupt Newspapers Leave Employee Unions and Government Corporation Holding the Pension Bills

It has not been a good month for newspaper unions at bankrupt newspaper companies or the government corporation that insures pension funds. As part of their reorganizations, a number of bankrupt newspaper firms are not paying money owed union pensions or are quietly letting the guaranty pick up the tab for retiree costs.


  • Unions of Philadelphia Newspapers LLC (The Inquirer and The Philadelphia Daily News) were forced to accept 12 cents on the dollar for the $12 million the bankrupt company owned to employee pension plans as part the reorganization plan.
  • The Chicago Sun-Times off-loaded $49.1 million of its underfunded pension obligations for 2300 retirees and employees to the Pension Benefit Guaranty Corp. The paper and it suburban subsidiaries were purchased out of bankruptcy without the new owners assuming the pension obligations.
  • The Dayton News Journal dumped $15.4 million in underfunded pensions payments on the Pension Benefit Guaranty Corp. , which will ensure 1,100 current and former employees receive benefits owed to them. The newspaper and its assets were purchased out of bankruptcy by Halifax Media, but it did not take on the pension liability.

The Pension Benefit Guaranty Corp. is a federal corporation designed to protect pensions when company-run pension funds collapse or cannot pay agree benefits.

These types of problems occur when money due for benefits is not paid into pension funds or money is removed from company-run funds by the company. When this occurs companies use the money for other purposes: increasing liquidity, paying bills, giving executive bonuses, etc. However, this creates problems if the company ceases operating or if liabilities of underfunded pension obligations weigh too heavily on the balance sheet.

Existing laws allows employers to take money from company-run funds if they are overfunded, but do not require them to immediately fully fund them when they are underfunded. Overfunding and underfunding, however, are normal conditions caused by fluctuations in stock and bond markets in which pension funds are invested. Because overfunding and underfunding tend to even out over time, companies using the funds like a bank can create problems. Even when pension funds are not run by companies, delays in paying obligations create problems if the company closes or goes into receivership.

Newspapers across the U.S. have carried large stories about pension payment problems at other bankrupt companies, but coverage of the problems at their newspaper colleagues have drawn scant attention.

Tuesday, 27 July 2010

Saratoga v. Monmouth: weekend 1

Well, Monmouth had Rachel Alexandra, and Saratoga had so much rain that it flooded out Danny Meyer's hot new Shake Shack restaurant. But, no surprise, guess which track had the better performance on July 23-25, Saratoga's opening weekend?

For the three days, Saratoga had paid attendance of 62,243, versus Monmouth's 28,365. Even on Saturday, with Rachel Alexandra at the shore, Monmouth drew only 12,859. The same day, with the highlight at saratoga the Coaching Club American Oaks, won by Devil May Care, Saratoga drew 20,352.

On-track handle for the three days at Monmouth was $1,975,627. At Saratoga, where there were 6 fewer races, on-track handle was more than four times as much, at $8,638,566. Similarly, all-sources handle for the weekend at Monmouth was $24,130,504, while at Saratoga it was $43,431,852. Monmouth did much better, comparatively, on its simulcast, OTB and ADW betting, but even with Rachel Alexandra running Saturday, it didn't equal Saratoga's handle on any of the three days.

For Monmouth, off-track betting accounts for about 92% of total handle, while for Saratoga, "only" 80% of the handle comes from off-track. That means that the blended takeout rate returned to the track is somewhat lower for Monmouth than at the NYRA track. To some degree, that imbalance may be made up by what Monmouth retains from its patrons' bets on other tracks' simulcasts, but, given the lowish attendance at Monmouth, I suspect the balance is still well in NYRA's favor.

Monmouth ran its usual 36 races over the weekend, with an average field size of 9.3, and an average purse, including the $400,000 extorted by Jess Jackson as an appearance fee for Rachel Alexandra, of $69,103. At Saratoga, over 30 races, the average field size was a very healthy 8.7 -- way up from Belmont's 7.0 despite a bunch of off-the-turf races -- and the average purse was $57,237, not all that much behind Monmouth.

The quality of racing was much higher, at least for this weekend, at Saratoga than it had been at Belmont. Only 6 of Saratoga's 30 races were claimers, including one maiden claimer and four "conditioned" races (N2L, N3L, etc.) At Monmouth, more than half the races -- 20 out of 36 -- were claimers, including seven maiden claiming events. That's part of the reason that Monmouth's per-race purse average was so (relatively) low. Yes, there are $80,000 allowances in the condition book, but for every one they ran at Monmouth, they carded three claiming races.

Actual claims made were 15 at Monmouth, or about 0.75 per claiming race, and 8 at Saratoga, or 1.33 per race (in both cases not counting the allowance/optional claimers, which I classified as allowances). That's a lot more active claim box at Saratoga than had been the case back at Belmont.

I'm not sure yet what this all means; I'll keep watching the two meets and see if we can draw any grand conclusions. For now, though, Saratoga seems to be, at a minimum, holding its own against the Monmouth challenge.

(If anyone wants the spreadsheet from which these figures were derived, just let me know, with your email address.)




Saturday, 17 July 2010

Monmouth vs. Belmont: the Numbers

Much has been made of this year's big increases in attendance, handle, field size and purses registered by Monmouth Park in its innovative three-day-a-week race meet. Halfway through the summer meet, attendance is up 13% over last year, at 10,500 a day; all-sources handle has more than doubled, from $3.5 million a day last year to $7.7 million; and on-track handle is up 43%, much more than the corresponding increase in on-track attendance. So, it seems, Monmouth's ballyhooed "million dollars a day" in purses for a shorter meet appears to be the wave of the future.

Meanwhile, the New York Racing Association's Belmont spring-summer meet seems to have been lost in the financial mess that is New York racing, with the performance of the horses and the track buried by news of the state government's continuing ineptitude over putting slot machines at Aqueduct, a mere nine years after they were authorized, and of the continuing failure of New York City Off-Track Betting Corp. to pay the race tracks and horse owners what it owes.

But a comparison of the data for the two meets, Monmouth and Belmont, reveals that there still may be some life in New York racing -- enough life so that, with a modicum of responsibility from Albany and a little innovation in trhe racing office and in marketing, NYRA might well have some hope for the future.

To compare the two race meetings, I looked at the data for the past four weekends, from June 18th through July 11th -- including the July 4th holiday -- for the two tracks. That's 13 racing days at each track. The comparison showed some interesting numbers:

Handle: Monmouth had total all-sources handle of $98.2 million for the 13 race days, an average of $7.6 million daily, or $629,000 for each of the 156 races run during the four weeks. Belmont, on the same 13 days, had a total handle of $112 million, or $8.6 million and $882,000 per race. Belmont ran a total of 127 races on the 13 days -- mostly 9- and 10-race cards, compared to the 12 races daily at Monmouth.

Field Size: The edge in handle for Belmont is even more impressive when one takes into account that Monmouth averaged 9.0 starters per race during the period, while Belmont barely managed 7.0 starters. Since handle generally increases in an almost linear relationship with field size, it's clear that Belmont would have done even better had it managed to come closer to its long-term target of eight starters per race.

Some of the difference in field size was unquestionably accounted for by the high purses offered at Monmouth, as well as the guarantee of a $1,500 payout for every starter at Monmouth. When you can pick up a $1,500 check for finishing 8th in a $5,000 claimer, the Monmouth entry box looks pretty attractive.

Purses: Monmouth had been touting "a million a day" in purses, and it's true that the condition book did add up to $1 million each day -- but only if you considered not only the 12 races that were actually run, but also the races in the book that weren't used and the extras put up by the racing secretary. In fact, for the 13 days in question, actual purses awarded topped $1 million on only two days, and the average was $807,000 a day, or $67,300 per race. True, that was a lot more than was paid out at Belmont, where purses averaged $452,000 a day, or $46,300 per race. But with higher purses on offer by NYRA at the upcoming Saratoga meet, the per-race difference may not be as big as some New York-based owners and trainers feared.

Quality of Races: There were some striking differences between the two tracks in the type and quality of the races offered. In the 13 days, Monmouth offered 17 stakes races, compared to only 7 at Belmont. Monmouth had 36 allowances (23% of all races), of which 11 were for the limited pool of New Jersey-breds. Belmont, in the same period, ran 31 allowances (24% of the total), of which 12 were for its much larger pool of state-breds. Monmouth had 20 maiden special weights, nine of them for state-breds.a, while Belmont had 26, 15 of which were for NY-breds. Belmont had 20 maiden claimers (16% of its total), compared to only 18 at Monmouth (11.5%).

The big difference was in the nature and quality of the claiming races. Apart from the maiden claimers, Monmouth ran 63 claiming races (40% of its total), while Belmont ran 35 (28%). But Monmouth's races were almost entirely open claimers, spread reasonably equally over the price spectrum: 15 at claiming prices above $25,000, 22 at $10,000-$25,000, and 25 below $10,000. In New York, by contrast, racing secretary P J Campo continues his infatuation with conditioned claimers -- races for non-winners of two or three lifetime, for horses that haven't won in six months, etc. Of the 35 claiming races at Belmont, 27 -- nearly 80% -- were conditioned claimers. A few years ago, New York didn't run any of these races. Now it runs nothing but. I don't know whether P J could fill a racing card without resorting to the conditioned claimers, but the anemic 7.0 starters per race average over my study period suggests he might not have done any worse had he stuck to the traditional open claiming structure. And he would have had the added excitement of lots more claiming activity. At Monmouth, in the 13 racing days from June 18th through July 11th, 109 horses were claimed -- more than 8 per day. At Belmont, total claims for the same 13 racing days were 14, barely one per day. There just aren't the races at Belmont with attractive claim prospects, and the trainer making a claim doesn't have the options for future races that would be available with a more traditional claiming structure.

No wonder I've been having a hard time finding a suitable claim for my claiming partnership. If it weren't that we all want to race in New York, I'd be looking at Monmouth. And most people who want to make new claims are already there. I don't know if Charlie Hayward and P J Campo consciously set out to destroy the claiming game in New York, but, whether intentional or not, that's what they're doing.

As the figures above show, NYRA and the Belmont meet held up pretty well against Monmouth's challenge. But claiming is an important part of a race meeting, and by stifling claiming activity through a surfeit of conditioned claimers, NYRA is endangering the longer-term health of an important segment of the industry.

Tuesday, 13 July 2010

The NYRA Audit - No Good Deed Goes Unpunished

Earlier this year, displaying the political sense that has so often eluded it, the New York Racing Association (NYRA) agreed to turn over its financial records to State Comptroller Thomas DiNapoli so the latter could conduct an audit of NYRA's shaky finances. NYRA had previously unleashed its stable of pit-bull lawyers in an effort to block the Comptroller's request, a position that drew widespread criticism, and the turnaround in February seemed a smart move. Perhaps it even helped NYRA convince the otherwise clueless politicians in Albany that they had to make good on their contractual promises to advance NYRA the money it was losing as a result of the state's endless dithering on awarding a contract for slot machines at Aqueduct.

But yesterday, the other shoe dropped. Comptroller DiNapoli released his audit of NYRA, complete with a scare-laden press release. DiNapoli concluded that NYRA should somehow scale back the level of its operations to what would be sustainable without slots revenue and without the $20 million or so that's owed to it by the bankrupt New York City OTB Corp.:

"given NYRA’s spending patterns and its continued reliance on VLT revenue that failed to materialize, NYRA would have run out of cash (i.e., not have had sufficient cash to pay its operating expenses) sometime in early June 2010, if it had not secured external financing. Even with this State financial assistance, however, NYRA could again experience a cash shortfall in 2011 if the Aqueduct VLT facility does not become operational and its expenses are not further curtailed."

Not mentioned is the state's own role in causing the slots-revenue screw-up, a fact tacitly acknowledged by the Legislature earlier this year when it advanced NYRA some $25 million to get through the next 12 months -- a sum significantly below the amount that NYRA would have received had the Aqueduct racino been up and running, and considerably below what the State itself contractually promised to NYRA in the bankruptcy settlement in 2008.

I suppose NYRA could cut back to a level supported only by on-track and simulcast wagering, without either the NYC OTB money or the slots revenue. If that happens, watch out for traffic jams of horse vans heading out of the Belmont stable area for Monmouth, Philadelphia, Delaware and, who knows, maybe even Ellis Park. It would be racing, but it wouldn't be the world-class racing that has made New York most prestigious place to race for more than a century.

The State authorized the Aqueduct racino in 2001. Nine years later, it's about to fail in yet another attempt to name the racino operator. This will be the fourth aborted attempt, and the smart money is on dumping the decision in the lap of the next Governor, who won't even take office until January. Back in 2008, the state promised NYRA $2 million-plus a month for each month after April, 2009 that the slots weren't operating. If the state keeps its promise and pays the money, there's no NYRA fiscal crisis. If the slots are running and the NYC OTB situation is solved, NYRA looks like a healthy, profitable enterprise. But DiNapoli, originally appointed by his buddies in Legislature back in 2007, over the opposition of ill-fated Governor Eliot Spitzer, has to run for re-election this year. And I guess he thinks he'll get some votes by projecting a tough-guy image and beating up on all those rich horse owners in NYRA.

DiNapoli's solutions to the problem are generally as wrong-headed as his analysis of the problems. And in fact, the proposed solutions would come nowhere near solving the revenue problem caused by the delay in slot-machine revenue and the continuing failure of NYC OTB to pay NYRA what it owes.
For example, DiNapoli says NYRA should end the free horse-van service that conveys horses stabled at one track to another NYRA track when they're entered in a race at the latter. He suggests either ending the service completely or charging horse owners for it. Either "solution" is absurd. NYRA is far from alone in providing free transportation between tracks. Churchill Downs Inc. does it between Churchill and Arlington, Churchill and Keeneland do it for each other, the Southern California tracks pay for buses to whichever track is running at the time, Gulfstream buses horses from the Palm Meadows training center, and the Maryland tracks provide buses between Pimlico, Laurel and the Bowie training center. In every case, the distances involved are far greater than the 10 miles between Aqueduct and Belmont.

Now, what about having the owners pay for the van. Let's see, we already pay $100 a day or more to send a groom with our horses to the ill-conceived security barn, and we pay upwards of 4% of the purse in various required charges taken out by NYRA before we get our money, not counting the jockey's fee and the trainer's 10% (now, sometimes, 12-13%) commission. So sure, let's add another $100 or so each way for the van. Just one more reason, if one were needed, to head on down the Jersey Turnpike to Monmouth. At least down there, every starter is guaranteed a minimum of $1,500. In New York, all the starters that finish worse than 5th collectively receive 2% of the purse. So, if you're in a $40,000 race with a field of 12, and you don't finish in the top five, the owner gets the princely sum of $114 -- and has to pay a jockey fee of $100, a variety of fees for Lasix, for the NY State Racing and Wagering Board, $100 or more to the trainer as a race-day fee to cover the cost of the groom, $23 for the pony to take the horse to the starting gate, etc. etc. Enough.

As it is, NYRA is averaging just about 7 horses per race at Belmont this spring, while Monmouth is averaging close to 10., Anything that further reduces field size at NYRA tracks is a really bad idea.

(The Comptroller's report does have a ray of light, though. It states that NYRA will be saving upwards of $1 million by eliminating the detention barn at Aqueduct. For those not familiar with the situation, one of the "reforms" introduced as NYRA emerged from criminal indictment and bankruptcy a while back was to required horses entered in races to be transferred to a holding barn six hours before their races, so the state could presumably monitor the giving of illegal drugs. A good public relations move, perhaps, to shore up NYRA's image and reassure bettors, but an unmitigated disaster for owners, trainers and horses. The detention barn, as noted, increases costs, and has an unpredictable effect on some horses. Many horses react badly to being taken out of their usual comfort zone, which encompasses their barn and the race track. And, in summer, the holding barn can be brutally hot, leading some horses to "wash out." Good to know it won't be coming back at Aqueduct, but how about getting rid of it at Saratoga and for the Belmont fall meet as well? New York already has the most comprehensive pre- and post-race drug testing in the country; the holding barn at this point is an expensive anachronism.))

Another of DiNapoli's recommendations was to reduct the compensation of the state-mandated "integrity monitor" for NYRA, the law firm of Getnick & Getnick. They receive $125,000 a month, or $1.5 million a year. DiNapoli says billing them at an hourly rate might save a few hundred thousand. As NYRA Trustee James Heffernan points out in his reply to the audit report, the Comptroller appears not to understand either (a) that the arrangement with G&G was previously approved by the state or (b) that it IS in fact based on billable hours, with unused hours carried forward. Now, personally, I think that the whole contract is probably a waste of time and effort, but, since the State required it, it's a bit odd for a state official to be criticizing it.

NYRA is running an operating deficit of some $30 million a year. Funny, that's just about what the slot machines would produce, if the state could ever get its act together and anoint an operator. All the rest is nickel-and-dime stuff. Tom DiNapoli's energy would be better spent investigating what his former colleagues in the Legislature were due to get for the thousands of "member items" stuffed into the state budget and, so far at least, vetoed by lame-duck Governor David Paterson. Don't hold your breath waiting for that audit, though.

Wednesday, 7 July 2010

Competitive Struggles Among Television Platforms

Since the emergence of cable and satellite television services there has been struggles among platforms to increase their attractiveness to audiences and to draw market share from terrestrial television in developed nations. These struggles have had affected content producers, broadcasters, platform operators and regulators attempting to fashion socially optimal broadcasting systems.

In the first competitive struggles between terrestrial broadcasters and cable operators, broadcasters controlled the highest quality contemporary programming and cable operators primarily competed by offering a wider variety of channels and providing premium movie channels. In many locations broadcasters actively sought regulatory policies to keep their channels from appearing on cable in order to reduce its attractiveness as a competitor.

As cable matured and satellite services emerged, the nature of the struggle shifted as greater subscription and advertising revenues allowed cable networks to offer higher quality contemporary programming. In this competitive phase, terrestrial, cable and satellite operators began struggling for exclusivity of content that would drive audiences to the platforms. Gaining exclusive rights to first broadcast runs of motion pictures, sporting, musical and other events, and high quality original programs became primary goals. In this environment, producers of content and owners of event rights sought to maximize their returns across the platforms. while platform operators sought to maximize their returns by gaining market power through exclusivity. This led to negotiations based not only on transmission rights but exclusivity rights as well, which dramatically pushed up costs of some content—especially sports rights.

As cable garnered a larger audience share, broadcasters that had previously been opposed to carriage of terrestrial signals on cable because asking regulators for ‘must carry’ rules to require cable operators to carry terrestrial channels so they could have additional access to audiences or audiences in places their terrestrial signals had not previously reached. This was especially useful for advertising supported channels, both public service and commercial.

In recent years, the widespread success of cable and satellite platforms and the shift of wealth from terrestrial to other platforms has led broadcasters to demand payments from cable and satellite platform operators for carrying their channels. The newer platforms are resistent and in some nations the struggle over payments remains on-going.

The digitalisation of terrestrial, cable, satellite, and broadband platforms has now created multiple opportunities of distribution of audiovisual materials and is creating a new environment in which additional competitive struggles are taking place among platform operators. At stake are the significant potential gains from advanced paid video-on-demand services and IPTV. Platform operators—DTT, cable, satellite, and telecommunications firms that offer broadband services—are now struggling to ensure that they are not competitively disadvantaged compared to other operators. Operators that control or have high market power over platforms, especially broadband links and systems needed for advanced services or interactive DTT services, will have significant advantages in the next generation of services. Consequently, there is a great deal of effort on the part of major platform operators to acquire access to all platforms and services through ownership, alliances and joint ventures and in many cases there are outright efforts to control those platforms and servcies.

The trajectory and outcome of this competitive struggle is particularly important because it will have significant impact on the range of services and costs for services available to the public. These developments also have significant importance for the relationship between content producers and platform operators because the means of compensation is likely to evolve from current transmission rights and exclusivity rights payments to one involving revenue and profit sharing. This has significant implications to the funding and ways that contemporary terrestrial television programming is created and role of terrestrial broadcasters in the new environment.

Tuesday, 29 June 2010

Suppose They Gave a Party ...

Tom Precious of the Blood-Horse is reporting that Delaware North, one of the six registered bidders for the long-delayed Aqueduct slot machine contract, is pulling out of the bidding. Bids are due at 4 pm today in the latest attempt to name a racino operator.

Delaware North is one of the more experienced slot-machine operators among the six potential bidders, with some 10,000 slot machines scattered across the US, including the racino at the upstate New York Finger Lakes track. Presumably, the company knows how to do its sums before making a bid, so its last-minute decision to pull out is, well, troubling.

Although no one at Delaware North was speaking publicly, Precious cites unnamed sources as saying that the reasons for the pullout included the 1% cut in operator fees included in the latest version of the New York state budget, the requirement that the winning bidder pony up $300 million BEFORE negotiating a final agreement with the state, and doubts as to whether New York State can manage to borrow the $350 million it's supposed to come up with to finance construction of the Aqueduct racino. Sound like good reasons to me, although the $300 million up-front payment has been part of the deal from the beginning of this round of bidding, so there's no cause for surprise there.

The real reason, it seems to me, is likely that Delaware North has spent the past month observing the New York state government in action, and what it's seen has certainly not been encouraging. The state may indeed have a budget sometime later today, but, if I were an investor about to put $300 million into a venture dependent on the Albany Follies, I'd certainly be having second thought.

Still three and a half hours before the bidding deadline. Wonder how many others among the bidding groups -- Penn National, S.L. Green Realty Corp., Empire City Casino/Yonkers Raceway, Genting New York, and Clairvest Group -- will also have second thoughts. Could be a pretty small party by the deadline.

Friday, 18 June 2010

Churchill's Ongoing Makeover

Now that Churchill Downs Inc.'s annual meeting is over, it's an opportune time to take a close look at the leading US race track operator's financials. As we've pointed out here in prior years, Churchill has a long-term strategy of increasing the profits from its online betting operations (Twin Spires and the newly merged YouBet) and casino gambling (in Louisiana, and now at Calder in Florida), while managing the ongoing decline of revenue from live racing. That trend continues to be evident in Churchill's numbers the calendar year 2009 and for the first quarter of 2010.

In fact, it appears that the trend is accelerating. In comments at yesterday's annual meeting, and in an interview with the Lexington KY Courier-Journal, Churchill CEO Bob Evans (definitely not a racing guy) said that the future of live racing at Arlington Park in Chicago -- without slot machines and without access to loans from the Illinois state government -- was in serious doubt, ands, even more surprising, said that there was a good chance that the number of live racing days would be reduced at Churchill Downs itself. Churchill, according to Evans, is starting a review of all its live racing sites -- Churchill Downs, Arlington, the Fair Grounds and Calder -- with a view to determining how much, and , to cut racing days. And, even before that review gets underway, Churchill has already reduced its racing dates for 2010 as compared to last year -- 4 fewer at Churchill Downs, 2 fewer at Calder, 7 fewer at Arlington and 6 fewer at the Fair Grounds, for a total reduction of 19 days, or about 5%.

That may be bad news for owners and trainers, but it's apparently good news for the shareholders. Churchill's stock price is currently well over $34 a share, significantly up from the $20 low point it reached in 2009.

Churchill's shift of emphasis from live racing to online wagering and slot machines has been underway for some time. In 2006, live racing accounted for 88% of the company's revenue; in 2009, that percentage was only 53%, and in the first quarter of 2010, for the first time, non-racing sources for more than half of all revenue.

Even with the recent reductions, Churchill still runs some 4,100 races a year at its four tracks, or about 8% of the US total. That makes it the largest single track operator in the country, even as it looks to steadily reduce its dependence on live racing.

In its place, and, to a considerable extent, in competition with its own live product, Churchill is expanding its online and off-track wagering operations. The company runs a network of OTBs in Kentucky, Illinois and Louisiana (New Yorkers take note: some places have figured out that having the tracks own the OTBs might actually work). It also owns the expanding Twin Spires online wagering platform, now merging with Youbet.com, as well as the Bloodstock Research online date supplier. In the first quarter of 2010, the online operations accounted for $18 million in net revenue, about a quarter of the company's total. And, as a corporation, Churchill actually prefers to have bets placed through its online network rather than at the track, since the share of the takeout that goes to purses is much less for online bets than it is for on-track betting. Not a good thing for horsemen when your track operator doesn't have any incentive to charge online bet-takers the maximum it can get.

Even though Churchill is still a small player in the non-racing gambling business, with just 1,200 slots at Calder and 1,400 machines in Louisiana, that sector accounted for $26 million in net revenue in the most recent quarter, or more than one-third of the company's total. As, inevitably, Churchill adds more slot machines and other casino-style revenue sources,the gaming side of its revenue will continue to increase, at least vis-a-vis revenue from live racing.

While Churchill still has a comfortable balance sheet, with $17 million in cash and some $187 million in a credit line available as of the end of the first quarter of this year, it does face some hurdles down the road, with some $70 million in debt repayment due in 2013-14. By then, though, if things keep going as they are, Churchill will be even less of a horse racing company and more of an online wagering and slot-machine operator. They're doing what it takes to stay alive, but is it good for the racing game?



Saturday, 12 June 2010

Getting It Wrong: The FTC and Policies for the Future of Journalism

Following hearings on the state of newspapers this past year, the U.S. Federal Trade Commission staff has now prepared a discussion paper of potential policy recommendations to support the reinvention of journalism.

It is a classic example of policy-making folly that starts from the premise that the government can solve any problem—even one created by consumer choices and an inefficient, poorly managed industry. Most of the proposals are based in the idea of using government mechanisms to protect newspapers against competitors and to create markets for newspapers offline and online.

The FTC’s staff ignores the fact that most newspapers are profitable (the average operating profit in 2009 was 12%), but that their corporate parents are unprofitable because of high overhead costs and ill-advised debt loads taken on when advertising revenues were peaked at all time highs. It also fails to make adequate distinction between longer term trends affecting newspapers and the effects of the current recession. The staff thus blends the two together to give a skewed picture of the mid- to long-term health of the industry.

Policy alternatives suggested by the staff for consideration include:
  • Limiting fair use provisions of copyright and providing new protection for “hot news,” which would give first news organizations to distribute a story a proprietary right to the facts in their article
  • Providing a variety of types of subsidies for news providers
  • Changing tax exempt status laws to make it easier to obtain not-for-profit status and funds from charitable donors
  • Taxing advertising, spectrum, internet service provision, consumer electronics, and cell phones to provide funds for news organizations
  • Creating new antitrust exemptions allowing price collusion and market division
It is hard to ignore the irony and incongruities of a government agency whose purpose is to protect competition and effective markets suggesting anti-competitive practices and taxes that will have negative effects on consumers, competitors, and other companies. Setting those aside, however, none of the suggestions deal with the real underlying economic and financial problems of the news industry: that fact that many consumers are unwilling to pay for the kinds of news provided today and that news organizations need to radically change their management practices and begin reducing organizational inefficiencies.

If commercial news enterprises can’t effectively manage themselves, compete in markets for their products and services, or find effective business models for themselves, why does anyone think that bureaucrats in the government have any ability to solve those problems for the news industry?

Monday, 24 May 2010

NYRA Rescue Passes State Senate

I've been advised that the New York State Senate has approved the $25 million loan (not bailout) that will tide the New York Racing Association over until either NYC OTB starts paying what they owe or the state finally approves a slot machine operator for Aqueduct. The loan was tacked onto the weekly bill extending the state budget, since the legislature failed to meet the April 1 deadline for a new fiscal year budget. The measure now heads to the Assembly, where it should pass.

Whew.

Tuesday, 18 May 2010

There He Goes Again

Frank Stronach just can't help himself. Fresh from his bankruptcy court success at the end of April reneging on his promise to sell the Maryland Jockey Club, he's now managed to throw the Santa Anita fall meet in doubt, to bring in a partner in Maryland that's not exactly known for its commitment to racing, and to have waved goodbye to yet another experienced industry executive passing through the Magna revolving door.

Beginning with the latest news, Santa Anita track president Ron Charles abruptly resigned, announcing his departure on Tuesday and clearing out his desk on Wednesday. As Brad Free pointed out in The Daily Racing Form, Charles is the sixth chief executive at Santa Anita in the 12 years that Stronach has owned the track. He was preceded through the revolving door by Bill Baker, Cliff Goodrich, Lonny Powell, Jack Liebau and Jim McAlpine.

After four years on the job, Charles had probably had more than enough of trying to deal with the Stronach ego, not to mention being tired of trying to figure out why none of the synthetic surfaces installed at the Arcadia track seemed to work. Still, the lack of continuity, a common feature at all Stronach tracks, is troubling.

Even more troubling is Stronach's decision to use the Magna bankruptcy as a pretext for voiding the contract between Santa Anita and the not-for-profit Oak Tree Racing Association. Oak Tree has run the fall meet at Santa Anita since 1969, and had a contract with Santa Anita that was supposed to run through 2016; any profits from the meet are poured back into the thoroughbred industry. But Stronach apparently thinks he has a better idea, although, typically, he hasn't yet told us what that idea might be. (Good coverage of the Oak Tree story here and here.) While Oak Tree is still saying that it hopes to negotiate a new deal with Stronach, Del Mar and Hollywood would both be delighted to play host to the fall meet.

Meanwhile, the cancellation of the Oak Tree agreement may have rudely awakened the Breeders Cup board from its wet dreams of a perpetual West Coast BC festival. Before the latest Stronach salvo, the BC Board was reportedly very close to deciding that, after this year's event at Churchill, the BC would return to Southern California for the next five years, coinciding with the final years of the Oak Tree lease. That would have peopled the big day(s) with B-list celebrities, many of whom, it turns out, are paid for out of BC promotional funds, but who, we're told, juice the event's TV ratings. Now that October racing in California may be happening somewhere other than Santa Anita, it'd be pretty hard for the Breeders Cup board to stick to that unpopular plan. In a way that's a shame; I was really looking forward to an anti-BC fall dirt-racing championship day at Belmont.

Earlier this month, Stronach announced a "partnership" with Penn National Gaming, Inc. to operate the Maryland tracks. Details of the partnership are as yet unknown, if they've even been agreed between the parties, but the deal suggests a shift of focus away from horse racing and toward greater emphasis on slot machines. Penn National does operate three thoroughbred tracks (Zia Park in New Mexico, Charles Town, and the company's eponymous track in Grantville, PA) as well as three harness tracks (in Bangor, ME, Freehold NJ, and Toledo, OH). But its principal business is running low-end casinos. In addition to the slots at four of its six tracks, the company also owns 14 stand-alone casinos, almost all of which are in the South and Midwest. I've been in one of the company's casinos, in Biloxi, MS, and even by the undemanding standards of that town, it is, to say the least, an inelegant operation. Hard to imagine that Penn National will do much to help improve the tone of Maryland racing. (For details of the company's operations, look here and here.)

The latest bit of bad news for Stronach is the lawsuit filed by some disgruntled shareholders in Magna Entertainment, who quite rightly believe that Stronach lied to the bankruptcy court in order to avoid having outsiders bid on the Maryland Jockey Club and other properties. As extensively outlined in The Paulick Report, Magna Entertainment shareholder Willam Bayne Jr. and his co-plaintiffs allege that Stronach deliberately ignored bids that would have provided more money for creditors, and maybe even some for the shareholders than did the inside-the-company bid from Stronach puppet MI Developments. It's tough to win that sort of challenge to a bankruptcy judge's decision, especially, as here, where the creditors announce themselves satisfied, but the depositions should be fun.

Broken contracts, broken promises, unsavory partners, a revolving door for executives. Funny, the new Magna sure looks a lot like the old one.

Monday, 10 May 2010

Honest Trainers Get Drug Positives, Too

Horse racing is full of suspicion. “All trainers are drug-wielding cheats.” “All the races are fixed.” “The trainers and vets get away with murder.” And those are just the versions that are printable in a family blog.

Now, I’ve been around the race track for a while, and I know it’s true that some trainers are probably using illegal chemical help, though that’s far more difficult to do these days, with super-sensitive testing devices, than it was a decade or two ago. But this is a story about state racing officials more concerned with their public image than with fair dealing, and about an honest trainer, trying to play be the rules, who’s getting a very raw deal all because he did exactly what he was told by people who should know.

Like most racing jurisdictions, New York makes the trainer the insurer of a horse’s condition. Whether an illegal substance was given to a horse by a vet, a groom, or some guy in a trenchcoat who sneaks into the stall, it’s the trainer who’s held responsible when that horse tests positive for a drug. In the grand scheme of things, that’s probably a good idea, since it’s a lot easier to police a finite universe of trainers than it is to track down those errant vets, grooms and guys in trenchcoats. But every once in a while, the trainer suffers through no fault of his or her own.

Case in point: This past Monday, May 5th, the New York State Racing and Wagering Board suspended trainer Bruce Brown for 30 days, and fined him $1,000, for two drug positives. [Disclosure: Bruce trains two horses for my Castle Village Farm partnership. I’ve watched him in his barn at Belmont, I’ve talked with him extensively, and each of the two horses he trains for me has won this year. Everything I’ve seen confirms to me that he plays by the rules.]

The drug in question was hydroxine, sometimes referred to as hydroxyzine. It’s an antihistamine that’s been around for more than 50 years, and is used to treat hives and other allergies in humans as well as horses. Here’s how and why Bruce used the drug:

Back in early March, two of his horses were suffering from hives. He attempted to deal with the problem by changing their stall bedding from straw to wood shavings, since the allergy (hives) was probably caused or aggravated by the straw. When NYRA refused to allow the use of wood shavings (something about a track-wide contract that requires straw, which is sold for use in the mushroom industry), Bruce went to Plan B, calling the vet. His vet prescribed the hydroxine, and told Bruce what the safe time would be to stop using the drug before each horse’s race. Bruce did stop the treatment as directed, and the horses, their allergic reactions under control, went on to finish first and second in their respective races. But apparently the vet’s instructions weren’t cautious enough. Post-race testing found traces of the drug in each horse’s system. Not enough to have any effect on their performance, but enough to cause a positive test.

Racing has an astonishingly long list of prohibited drugs. (Of course, two of the most egregious drugs, Lasix and, in Kentucky, Bute, aren’t on the list, but that’s another story.) You'd think the list would make a distinction between a major dose of the drugs and a small trace that can’t possibly have an impact on the results of a race. Some jurisdictions set threshold levels, below which a trainer isn’t penalized. Some don’t. But few listen to any kind of explanation from a trainer once traces of a drug have been found.

And when the regulatory agency has the attitude that all trainers cheat, as is the case in New York, the chances of getting a fair hearing are, to say the least, minimal.

So, Bruce Brown gets a 30-day suspension, two owners, through no fault of their own, have to repay purses that they thought they’d won, and the whole episode does nothing to clean up racing. It does, however, lend some urgency to the ongoing efforts to at least have uniform drug rules in all 37 states where there is horse racing. I don’t know if a uniform rule with a reasonable threshold level for hydroxine would have helped Bruce Brown in this case, but it couldn’t have hurt.

Some owners say they’ll drop a trainer the minute he or she has a drug violation, as Team Valor did with Ralph Nicks back in 2004. But it’s just not the right thing to do to a trainer who’s done well for you and who tried, to the best of his ability, to follow the rules. So, Castle Village Farm will be waiting for Bruce Brown to be back in the barn at Belmont on June 7th. We’re looking forward to more drug-free wins this year.

Challenges of Product Choices and Prices in Multi-Sided Media Markets

Commercial media have faced product and price challenges in 2-sided markets for more than a century, but are encountering greater difficulties in getting it right as they try to effectively monetize multi-sided markets.

2-sided and multi-sided markets are ones in which more than one set of consumers must be addressed and there is an interaction between strategies and choices for each set of customers. Prices for one group of consumers affects their consumption quantity and this, in turn, affects the prices for and consumption by the other groups. Optimal revenues can only be achieved by dealing with all groups of consumers simultaneously.

Newspapers are a classic example of 2-sided platforms. The first product is the content sold to audiences and the second is access to audiences that is sold to advertisers. This has been the basis of the mass media business model since late 19th century and the strategy has been to keep circulation prices low to attract a mass audience and then to make the majority of revenue from advertiser purchases.

In this model, success in selling the newspaper product affects ability to sell advertising access because more readers makes a paper more attractive to advertisers; conversely, success in selling advertising affects ability to sell the newspaper to readers because it provides resources that improves content and make the paper more attractive.

Getting prices right in this model is crucial, but most media have traditionally been relatively unsophisticated in setting prices. Few have used demand-oriented pricing, based on what the market will bear, or target return pricing based on achieving a specific rate of return. Instead most have set prices based on what the closest competitors are doing or on industry average price. They were historically able to get away with it because elasticity and price resistance were relatively low because of the near monopolies of past in many markets.

Today, however, product and price choices are getting much more complex because of rising competition and because media are shifting from 2-sided to multi-sided platforms in which relationships among consumers are compounded. This complexity is evident in the difficulties newspapers and magazines are having figuring out effective ways to provide and sell content online.

The problem occurs because there are paying audiences and advertisers for the print edition; free audiences and paying advertisers for the online edition; and some joint audience and advertisers who use both the print and online offerings. If one alters the free price online to create a paying audience, it not only affects the willingness of online advertisers to pay, but affects the willingness of joint audiences and advertisers to pay and thus effects performance of the print sales as well.

Creating the correct combination of content available in print and online, getting the content prices right, generating audiences in both places that are right for advertisers, and properly prices advertising is no mean feat. The situation is made even more difficult as publishers add eReaders and mobile services to the mix.

Those who think they can easily monetize newspapers, magazines, or other information products online ignore the significant challenges posed by multi-sided platforms and need to carefully consider the impact that these factors have on product and price choices.

Thursday, 29 April 2010

Tax Code Favors the Wall Street Gamblers, Not the Race Track Kind

With the Kentucky Derby coming up and with the overpaid and largely unrepentant thieves from Goldman Sachs in the Congressional hot seat, it seems an appropriate time to renew a question that I initially raised some 15 years ago, in an article in that well-known handicapping publication, The Tax Lawyer. Namely, why does the Internal Revenue Code treat the ordinary schlub’s horse racing and casino gambling winnings and losses so much less favorably than it does the much more dubious gains and losses that those Wall Street’s masters of the universe receive from trading in billion dollar derivative bets?


[For those who want to explore the legal arguments, the full text is at 49 Tax Lawyer 1 (1995), available on Lexis and Westlaw or in your favorite law library.]

That tax treatment is hugely different. Just for a start:


● Gambling losses cannot be deducted against any other income, only against gambling winnings. In contrast, net losses from Wall Street trading are deductible against the trader’s other income.


● Any excess gambling losses that are not deductible in one year cannot be carried forward to the next tax year, even to offset gambling winnings in that later year. Non-deductible derivatives trading losses in one year, in contrast, can be carried forward or backward and used to offset income in other years.


● Racing and poker tournament payoffs in excess of $5,000 are subject to withholding, at 28%, when the bet reflected odds of 300-1 or greater. And the Internal Revenue Service considers each combination a separate bet. So a Pick Six ticket that contains, say, 1,500 separate combinations and that returns $5,000 is treated as paying off at 2,500-1 (on a $2 bet), even though the bettor actually put up $3,000 and so got net odds of only 2-3. With 28% withholding, the bettor actually gets back only $3,600 for his $3,000. No such rules apply to bettors in that big casino on Wall Street.


● Even if they hold the contracts for only a day, Wall Street speculators are allowed to treat 60% of their gains from many kinds of derivative contracts as long term capital gains, which qualify for lower tax rates. Racing and casino winnings, in contrast, are all just ordinary income, taxable at higher marginal rates.


● There’s a 2% federal excise tax on gambling transactions, but none at all on financial market transactions. The mere mention of one – even a proposal for a tax as tiny as 0.1% or less -- causes the Wall Street propaganda machine to spew out dire predictions of the end of the world as we know it (not that that would necessarily be a bad thing).


“Gambling” and “wagering” are not defined, for income tax purposes, anywhere in the Internal Revenue Code or the Treasury Regulations. I guess it’s like Justice Stewart’s definition of pornography: we know it when we see it. Merriam-Webster, though, says that gambling is to stake something on a contingency or to bet on an uncertain outcome. Isn’t that just what the hedge funds guys and Wall Street traders were doing when they bought and sold credit default swaps and other opaque instruments of mass destruction?


To my surprise, there’s very little in the tax law literature or in the case law that addresses these definitional problems, except for a couple of recent articles arguing that bets on “prediction exchanges” (“I’ll give you 10-1 that Sarah Palin won’t be the next President of the US”) are more like tax-favored futures contracts than they are like sports bets (“I’ll give you 10-1 that Todd Pletcher’s Derby jinx continues”). A serious search of the law and literature (one has to do something when there are four dark days between Aqueduct and Belmont) shows not a single article or judicial decision in the past 15 years – since my piece way back in 1995 – arguing for better treatment for sports and casino bettors.


Perhaps we could get Mitch McConnell, in his role as the Senator from horse racing, to introduce a few amendments to the pending “financial reform” bill. Oh, I forgot, McConnell, majority leader of the party whose motto is “just say no,” is also the Senator from Wall Street. Guess that little conflict of interest isn’t going to get us very far.


But, seriously, wouldn’t it be some sort of victory for Main Street over Wall Street to amend the tax code so that bets placed on Wall Street get the same (unfavorable) tax treatment that I get for betting the Pick Four at Belmont? Who knows, if they had to think about the tax consequences of their misbegotten bets, perhaps those masters of the universe wouldn’t be risking quite so much of our money.


And on another topic: for the Triple Crown season, I’m also blogging on the New York Times site, The Rail. Here’s a link to my first piece, which was on Zayat Stables and Eskendereya.