Driving sustainable growth for Thoroughbred racing and breeding: Findings and RecommendationsDan Singer - Director, Media and Entertainment Practice, McKinsey & Company
Michael Lamb - Principal, Media and Entertainment Practice, McKinsey & Company Dan Singer: Thanks very much, Jim.
As you heard from Jim, The Jockey Club recognized earlier this year that racing is at a critical juncture. The Jockey Club asked us to analyze racing's economics for the next 10 years and recommend initiatives that could significantly improve the outlook for the sport.
Now, as you're going to hear, the current situation is very tough. We will take you through the numbers. I'll start here but I want you to know that about halfway through, we'll shift over to the growth strategy for the industry, which we believe passionately in and think will address some of the issues we're going to start with.
By any measure, Thoroughbred racing has declined over the last decade. In our view, the primary reason is a failure to innovate fast enough and well enough to compete for new fans and bettors. But let's take a look at the numbers: handle is down 37% in the last decade, attendance is down 30%, starts per horse and race days are both down 14%.
Now on the other hand and for context, the situation in racing is similar to most other professional sports, many of which we work in as Jim mentioned. As you'll see here, all sports face changing distribution models and fragmentation of fan interest: NBA finals TV ratings are down 24% in the last 10 years, Major League Baseball's All Star game TV ratings down 38%, and NASCAR's Daytona 500 and US Open Men's tennis finals TV ratings are also down. These are just some examples.
The core values of racing are still strong, notwithstanding the numbers we just showed you:
Finally, we recognize the many significant innovations in racing over the past decade — for example, new bet types, such as the Pick 6 and "Favorite vs. the Field," online wagering, dedicated digital television networks like TVG and HRTV, enhanced access to handicapping data, upscale off-track betting locations (such as at Woodbine)..., and event-based night racing such as "Downs After Dark" (at Churchill Downs).
But even with all of these innovations and improvements, we have projected that Thoroughbred racing is losing fans at a rate of about 4% a year. Let me repeat that: 4% per year. The reason that's such a big number to us is if you simply look forward through 2020, the fan base will only be 64% of what it was last year. The component's there, as you can see: every year, 2% of the fan base dies, 5% lapse... now that's replenished by 3% new fans so there is some new fan acquisition but the net of those numbers is a 4% loss per year.
Michael Lamb: This shrinking fan base, which is causing the decline in handle, is the core issue facing racing, and we spent three months this spring analyzing both root causes and potential solutions. During that time, we:
Dan Singer: From our research, we have identified five major causes of the decline in racing.
The first is intense competition from other types of gambling. The past 10 years have seen a major expansion in gaming availability and revenue outside racing. Here are some numbers:
Commercial casinos grew 34% between 2001 and 2010. Racinos have grown along with them, and now account for almost $7 billion in wagering, which is mostly slots, and that number is more than half the total handle on Thoroughbred racing in American now. There are 854,000 slot machines in 939 casinos across 38 states. Casinos now outnumber Thoroughbred racetracks by a factor of 6-to-1. So we have to recognize the really intense competition for gambling dollars that we're facing.
Also, poker — while illegal in its online form — was particularly innovative over the last eight years. Poker revolutionized its television coverage — financed by particularly two of the biggest online poker sites — its pricing via rakeback and rebate programs and its promotions and membership rewards programs. For a new bettor, online gambling and casino gambling offer significant advantages over Thoroughbred racing: they are available 24/7, and the games are typically very easy to learn and very quick to play.
The second major cause of racing's decline is brand perception. Our research with fans and non-fans alike has revealed that racing suffers from a negative perception relative to competition. Let's look at the numbers:
Michael Lamb: The third major cause is dilution of the best racing. So what do we mean by that?
The fourth major cause is the fan experience. New fans find many tracks to be out-of-date or in poor condition.
Dan Singer: The fifth major cause of the decline is fragmented distribution. Distribution of racing on television, online, and off-track is just too limited — particularly for reaching new fans. In our view, no other major sport has lost control of its distribution to the extent that racing has.
ADWs have grown to 20% of handle, and at the current growth rate could reach 44% of handle by 2020. Yet ADWs are not attracting new fans: just 0.4% of new fans were introduced to the sport through an ADW. Now in part that's because the ADW sign-up process is regulated and therefore rather cumbersome. In fact, our research shows that only 53% of potential customers who attempt to sign up for an ADW actually succeed in funding the account and placing their first bet. ADWs have told us that they no longer attempt to attract new racing fans, and instead build the experience for core race bettors. The result is an ADW experience that, for a new fan, is difficult, as you will see here. [video clip]
Michael Lamb: At current course and speed, the five factors we have just described will translate into a continued downward trajectory for Thoroughbred racing over the next decade. This includes handle, which we forecast could decline by as much as 25% from this year's levels, the foal crop, where we anticipate an additional decline between 9 and 18%, and all of the other players in the industry. For example, the number of viable tracks will decline by 27% over that decade; state revenue and tax receipts from racing could fall by as much as a quarter; and the average owner losses will increase by 50%.
I should add there is substantial risk for the results to be even worse:
Dan Singer: Now these projections are sobering...and some degree of consolidation is probably inevitable. Nonetheless, from all the work that we've done, all the stakeholders we've spoken to and all the analysis we've done, we're convinced that racing has the potential to innovate much faster than it has up 'til now. Racing has all the weapons it needs to compete in the battle for a new generation of fans and handicappers, including the unique advantage of being the only legal form of online betting in the country. Racing is in a fight against dozens of other sports for an oversaturated TV audience, and a fight against almost 1,000 casinos for the scarce dollars of American gamblers. Racing has to fight harder, faster, smarter and better, but we believe you have the tools to do it, and we'll take you through that now.
Before we do, I want to say that we are realists, and we know that you have lived this history for the last 10 years or, in some cases, more, and we went back with your help and studied that history. So don't be surprised if you have heard, tried, or even funded many of the growth ideas in our strategy before. The shift to online betting, online video, online gaming, smartphones, tablets, and mobile applications is changing the world of sports marketing in fundamental ways. We think that some of the same tactics that racing has used in the past and abandoned can be executed in totally new ways and with much more success. We also believe that success will come from individuals taking immediate action. We aren't relying on grand coalitions or universal consensus to move forward.
I said that we are realists, and that's partly thanks to the wake-up call we got very early in our research from many of you — some in this room — with regard to the challenges in racing. There were two constraints in particular that we wanted to highlight:
We are going to walk you through the nine initiatives in the growth strategy now. We said before that racing is losing 4% of its fan base every year — but if racing can execute all nine elements of this strategy successfully, we can eliminate those fan losses and stop the slide in handle.
Michael Lamb: The first initiative is fewer, better races along with better scheduling to increase field size and showcase the best product.
We have seen in practice that decreasing the number of races can actually increase total handle — Monmouth in 2010 provides a case in point. They cut summer race days by 47%, resulting in a 26% increase in average field size, a 117% increase in total handle and a 58% increase in revenue. There may well be larger challenges for Monmouth's economics, but this experiment with fewer, better races was clearly successful in its own right.
A key takeaway from our database analysis is that a large number of races and race days simply do not pay for themselves. According to our calculations — based on the most optimistic of assumptions — 28% of all races don't generate enough takeout, after taxes, to cover the cost of the purse; and nearly 50% of race days fail to generate enough takeout to cover the purse and the variable cost of putting on the race.
Eliminating these races can be profitable for both tracks and horsemen, as cutting a race and redistributing the purses and the starters to other races in the meet has a positive effect on the handle of the remaining races. For example, our analysis suggests that eliminating one race a day at Beulah Park and redistributing the purses and starters across the rest of the week at that track would result in a net handle increase of nearly 7%.
This opportunity also extends to race days. Enabling track executives and regulators to optimize their schedule for bettors will benefit both tracks and horsemen. For example, our model suggests that moving a race day at Delaware Park to a nearby day with 25% fewer competing races would result in a handle increase of more than 10%.
Fewer, better races will produce benefits for tracks and horsemen alike. However, to make this clear to all, and to ensure that the benefits are shared by all horsemen rather than just those with the best chance of winning on the day, such changes should be supported by new purse structures that pay all finishers. As an example, in 2009, Churchill Downs restructured its Kentucky Derby day purses to pay all horses in a race and found that field sizes increased despite a drop in total purse.
Our economic findings in this regard are very strong, and very general. I can assure you across the 600,000 races there are very few exceptions. However, we recognize that scheduling decisions are complex, and therefore that the best way to drive change here is to put this information into the hands of the people who are making the decisions every day, who can then balance profitability against all of the other considerations. With this in mind, The Jockey Club is working to incorporate our predictive models into their suite of scheduling tools to allow tracks to optimize race schedules.
Dan Singer: Our second initiative addresses innovative wagering platforms.
The core bettors we talked to expressed several concerns relating to wagering platforms in Thoroughbred racing. And I just want to emphasize how important core bettors are in the sport. One group of handicappers that we looked at who are members of a pretty large rewards program ... 1.6% of the handicappers accounted for ... 50% of the handle, which is just an extraordinary degree of concentration. So we take very seriously the feedback we got from core bettors in this process. The perception of past-posting is an important issue and core bettors would much prefer systems that would allow them to see odds in real time. Others told us that the majority of races don't have enough liquidity to be of interest to them.
We evaluated three possible ways to address these concerns: single-pool wagering, exchange wagering, and additional tote security:
We mentioned capital constraints facing the industry before. These initiatives to innovate wagering platforms have the advantage of mobilizing outside capital and tapping into technologies, talent, and business models from outside the industry, which we think is in their favor.
Michael Lamb: Our third initiative is an integrated rewards system.
We are going to speak here about the evolution of the ADW market. We'd like to introduce this very controversial topic by discussing one that perhaps is even more controversial — takeout and rebates.
I should say as preface that we recognize these are inherently complex issues. We are going to share with you today the results of our research and analysis, but I ask that you please don't shoot the messenger if some of our findings don't match your intuition and personal experience.
Our research shows that takeout is a major issue for core fans — 26% of heavy bettors we surveyed ranked takeout as one of the top two concerns affecting the sport. And in the course of our interviews, many longtime fans expressed intense frustration with today's takeout levels and the difficulty of finding attractive handicapping opportunities, given the cost of race betting.
To put this in context, let's look at player costs (which is takeout or rake, net of rebates) for typical casual and heavy bettors for a variety of gambling activities. You'll see ... that for a casual racing fan betting $50 per race for 2 races an hour, the hourly cost of racing after rebates, and by this we mean the takeout or rake, is $19 per hour, which is roughly in line with slots at $32 per hour and poker at $12 per hour.
Even though takeout as a percentage is significantly higher in racing than in these other gambling activities, in our research we found that fewer than 20% of Thoroughbred racing fans know that fact, and that only 1% of fans who stopped following racing in the last year cited takeout as a reason they left the sport
For a core fan, however, the picture is quite different. The hourly cost of race betting can be much more than for other gambling activities. The top 20% of horseplayers, who bet an average of $12,000 per month on Thoroughbreds, pay a takeout per hour of entertainment that is much higher than for heavy sports, poker, or slots bettors.... This is in large part because the prevailing rebate rates for race betting are lower than those for slots and online poker. As again you can see on the chart, online poker and casino slots offer rebates between 30% and 45%, whereas racing typically offers 5% to 15% of takeout back as a rebate. Casinos and online poker sites dedicate significant resources and sophisticated systems to determining the optimal levels of rebates and rewards and to creating incentives for more volume and to retain their core fans.
We strongly prefer rebates as the method to address the price-sensitive bettor. This is especially true since regulation of takeout denies tracks the latitude that typical retailers have to address concerns through experimentation with different price points.
Now back to ADWs. As we said earlier, online platforms represent the future of Thoroughbred wagering, although they have not yet met their potential for new fan development. We believe that ADWs also represent the best platform for more effective rebating and rewards programs.
For that reason we would like to see tracks — who still have many of the most important customer relationships in this business — embrace the ADW business. A track-integrated ADW, built on a strong at-scale technology platform, and with real investment to deliver world-class customer database marketing, could provide an unmatched experience for the best bettor, while also investing in and benefiting from new fan development. The recent deal between Keeneland and TwinSpires, for example, is a step in this direction which we applaud.
Dan Singer: Our fourth initiative is improved television coverage.
We spoke before about the widely acknowledged scarcity of racing on national television today — yet television is still essential for fan development. We are really heartened to see recent efforts to put more racing on television, including eight race days this summer right here from Saratoga. However, so far racing has struggled to find an economically sustainable TV model, outside the Triple Crown and the Breeders' Cup.
We have seen rapid innovation in other types of sports programming — just a few examples here, reality shows such as "The Ultimate Fighter" for UFC, new television technologies such as NFL's "Passtrack" and MLB's strike zone, and online companions, which are designed to be played along with a televised sport such as NASCAR's TRACKPASS.
In order to compete for new fans, racing should take a page from other sports and experiment with a wide range of format and technology innovations. For example:
Television is expensive and, in our view, will not break even from ad revenue or increased handle on the televised races alone. What television can do is to raise awareness of racing, and develop new online players and new track visitors who, in turn, can be converted into new fans and new handicappers. We believe online properties ... such as a free-to-play handicapping site, a social game, and ADWs can also provide a revenue engine for television that's never been there in the past, as Mike will talk about now.
Michael Lamb: Our fifth initiative is a free-to-play online game to help simplify race wagering for new fans. In our research, 20% percent of consumers — so this is not race fans but 20% of the American public — told us that the reason they don't bet on Thoroughbred racing is that it's too complicated.
The good news is we now have a mass-reach vehicle we can use to address that concern.
Free-to-play ".net" sites in other industries — for example, online poker — have been successful at teaching consumers how to play and attracting new fans, especially in conjunction with television promotion. As we have seen with Play Keeneland and Play Saratoga, a key advantage of free-to-play sites is that it takes less than a minute to register and begin playing.
There is a real opportunity for Thoroughbred racing to launch a free-to-play site to capture new fans. Some 37% of the American public we surveyed have indicated that they would compete on a free-to-play site. It's likely that such a site would also deliver a substantially younger demographic than racing enjoys today.
A free-to-play site could be different from handicapping competitions tried before: it would have more social integration through Facebook to allow you to compete against and also enlist your friends; it would be backed by prominent marketing on television; it would have links to ADWs to convert free-to-play consumers into paying horseplayers; and it would have an emphasis on on-boarding the new fan into the sport. The goal will be to enable viewers of a nationally televised race series to play along at home almost immediately, even if they have never bet on a horse in their lives.
Dan Singer: Our sixth initiative is a social game based on Thoroughbred racing. While the free-to-play site that Mike just described seeks to serve as a welcome mat to the sport for new handicappers, a successful social game can build racing's brand and relevance, especially among women. For those of you not familiar with social games, the average social game player is a 47-year-old woman — a little different from our core fans at Aqueduct — and a social game can reduce the stigma around race betting significantly.
Just a quick introduction to social games: Powered by Facebook, social gaming has become a major entertainment platform from virtually nothing five years ago. Facebook now accounts for 12% of all consumer Internet time in the U.S. — up from 7% just two years ago. Zynga, which you may have heard of in the news recently, is the leading social game developer. Zynga now has 230 million unique monthly users, about 5% to 10% of whom spend real money on virtual goods, which is their revenue model. At its peak, Zynga's popular game Farmville had 85 million virtual farmers —some of them may be annoying you on Facebook even today — 30 million of whom played every single day. At 34 million players, Zynga Poker is currently the biggest free-to-play site on the web. A top social game can generate revenues of over $25 million per year. So if you can create a very popular social game, it's a great business.
A social game for Thoroughbred racing could allow players to raise and train horses, race them against their friends, and compete on historic tracks. When we tested that game concept with consumers — we're talking about the general public, not race fans — 24% said they would be excited to try the game, which is a good number.
While there may be no direct conversion from social gaming to real-money betting, a social game could still promote major races in conjunction with a televised series; it could provide new prospects for the track, free-to-play, and ADW promotions; and it could be a stand-alone revenue generator.
Now finally, in addition to the fan development strategies we just talked about, we believe racing can strengthen its brand and create more value for stakeholders through three last initiatives, which we'll just summarize here...
Collectively, these nine initiatives and the strategy we just walked through can accelerate the pace of innovation; they can address the legitimate concerns of fans and handicappers; they can position racing for a new generation; and they can return racing to economic stability and, ultimately, long-term growth. These strategies can be successful without the creation of a commissioner and without any new regulatory interventions or mandates. Finally, they can be financed within the capital constraints facing the industry.
The Jockey Club is already starting to take action on some of these initiatives and Jim will describe now what is underway.