Churchill Downs Is Running Well, but Is the Plan Insidious?

By Andrew Beyer
Monday, April 27, 2009; D05

As the thoroughbred industry struggles and the largest owner of U.S. racetracks has declared bankruptcy, Churchill Downs Inc. continues to make a profit for its shareholders. The company will receive its annual windfall Saturday when as many as 150,000 people pass through the turnstiles to watch the Kentucky Derby.

Ever since the cigar-chomping entrepreneur Matt Winn built the Derby into a national event in the early part of the 20th century, Churchill has been regarded as a savvy operator and promoter. In recent years it has transformed the Kentucky Oaks (often a forgettable event) into a mega-attraction, too, and more than 100,000 people will watch the fillies run on Friday.

Churchill has always occupied an important place in the sport, but since the Magna Entertainment Corporation's bankruptcy, Churchill Downs Inc. has become the major force in the industry. In addition to its flagship track, it owns Arlington Park in Chicago, the Fair Grounds in New Orleans and Calder Race Course in Miami, plus several important ancillary businesses. But others in the industry wonder if Churchill will be a good role model, and there exists sentiment that Churchill Downs cares about live racing only two days a year.

The company acknowledges that it has shifted its traditional focus. In a message to shareholders that preceded its 2007 annual report, Churchill's chairman and CEO declared: "We want to achieve sustained revenue and earnings growth [and] in the no-growth U.S. thoroughbred industry this is no easy feat." They went on to discuss the promise of slot machines at the Fair Grounds and Calder, and Churchill's online betting operation, They made no mention of live racing.

Churchill has been aggressively developing, an enterprise that the industry calls an ADW -- for advance deposit wagering. "The business environment for horse racing has changed," said Bill Carstanjen, Churchill's chief operating officer. "When the customers tell us loud and clear that they want something, we have to listen." Customers have made it clear that they like the convenience of betting from home, and the company likes the fact that it's a lot cheaper to process online wagers than to operate a high-overhead racetrack. The company may see using its ADW as a platform for other forms of gambling -- if, for example, online poker is legalized in the United States.

Churchill sees the profitability of ADWs as so important that last year it fought a bitter -- and revealing -- battle over them. It wanted horsemen to settle for a much smaller slice of revenue from an online wager than they get from a bet made at the track. The horsemen at Churchill and Calder resisted, and the fight grew ugly. Churchill filed an anti-trust suit against a horsemen's group. The horsemen used their legal power to block simulcasts from the tracks, costing them millions of dollars in revenue from wagering. Churchill slashed purses. The racing product, particularly at Calder, deteriorated sharply. Customers were alienated. Steve Zorn, a lawyer who writes the excellent (and admittedly pro-horseman) blog, "The Business of Racing," offered this analysis:

"The accountants, lawyers and marketers in charge of Churchill (only four of the company's 12 directors, and none of its principal executive officers are what one would call racing people) have decided that their future lies in Internet businesses. One suspects that corporate management regards its live racing operations as nothing more than a necessary evil."

The company was the apparent winner in the complex ADW dispute, which it saw as a straightforward issue of economic give-and-take. "It's a question of how you reward the distributor and how you reward the producer of the product," Carstanjen said.

But the issue went deeper than that -- to the heart of the sport. Purse money is the lifeblood of horse racing. Owners already have little chance to break even, and if purses aren't reasonably healthy, fewer will want to get involved in racing. Fewer horses lead to an inferior product that fewer people want to bet. At one time Churchill would have acknowledged this fact. But now the company appears willing to fight to the death to get more money at the expense of the owners and trainers who help put on the show at its own tracks. Churchill's view of the industry has changed greatly since the late 1990s, when it embarked on a buying spree, acquiring such important tracks as Calder ($86 million) and Hollywood Park ($140 million.) As interstate simulcasting became a crucial part of the business, Churchill felt it had to control more distribution of the simulcast product. And it believed that its expertise would enable it to improve the operations of the tracks it bought.

But Churchill couldn't work magic with its acquisitions. In the last four years it has sold three of its properties and purchased no new ones. It got rid of Hollywood Park when California wouldn't authorize slot machines for racetracks. As a result, one of America's most famous tracks may be headed for extinction. Churchill's lack of interest in live racing and slotless racetracks may become relevant to the rest of the industry in the wake of Magna's bankruptcy, which has cast into doubt the future of tracks such as Gulfstream Park, Pimlico and Santa Anita. If nobody steps forward to buy and operate these tracks, and they are sold for real estate development, the impact on the whole industry could be devastating. Churchill won't comment on possible future acquisitions, though its interest in these properties is presumed to be tepid at best. (Having already sold Hollywood, why would it want Santa Anita?) But if the major player in the industry has decided that it cares mostly about making money from ADW operations and slot machines, and if it doesn't take any responsibility for the health of the sport, there may not be much of an industry left.

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