Robert L. Evans: Thanks, Alan. Good morning, everyone. Well, in 10 minutes it's almost
impossible to discuss the ADW business in any depth, so I'm only going to deal with the key issues.
The ADW business is hugely important to us, and I think it should be equally important to all of you
for two reasons.
First, the ADW channel is the rapidly growing distribution channel for our products. The on-track
and OTB/simulcast channels are flat to declining. We need to get the structure and economics of the ADW
business right, and we need to do that right now, because it is only going to become increasingly
important to us going forward. If we make the right decisions, the ADW business should have a very
favorable impact on racing's cost structure, and on our ability to introduce innovative new products
Second, I believe the ADW business holds more promise than any other channel for reaching the
under-40 demographic group. These individuals live their lives surrounded by technology. And if they
are to become horse racing fans, they are going to play our game online. It is a demographic certainty
that this group will determine whether racing has a future or not.
The current ADW model has been in existence, now under TVG's near exclusive control, for 10 years.
So, I think enough time has passed to fairly ask the question: Has it worked? In my opinion, the answer
is no. Consumer spending on Thoroughbred racing has not grown appreciably, and as a percent of
consumers' disposable income it has declined sharply.
TVG has stated that wagering on races carried live on TVG is 900 percent greater than on races that
they stream on the Internet. Sounds good to me. But let's get real. Take two races with identical
conditions and field sizes, same purse, at the same track and on the same day. Does anyone believe that
the racing handle on the race that TVG televises will be 900 percent higher?
And, if that claim is true, why hasn't handle grown 900 percent over the last 10 years while TVG has
had almost exclusive control of our television rights? The reality is this, courtesy of The Jockey Club
and Department of Commerce data: Inflation-adjusted handle has increased 0.3 percent annually over the
last 10 years. And, total U.S. Thoroughbred handle as a percentage of personal disposable income, which
is a pretty good proxy for the share of wallet that we are getting from consumers, is 25 percent lower
today than it was 10 years ago.
There are three problems with the current model.
The first problem is that exclusivity rarely breeds innovation. By giving one entity, TVG, almost
total control over the ADW wagering and television rights for the industry, we've significantly limited
the scope and pace of innovation, and it's innovation that attracts customers. No new customers, no
growth. That's what the data of the last 10 years shows.
Problem number two is that the ADW financial model doesn't return sufficient money directly to the
horsemen and tracks that put on the races. This has put enormous financial strain on those tracks and
horsemen who are trying to invest in creating a better racing product, and it has further limited
innovation. TVG has stated that they return about 14 percent of the handle to the industry. That sounds
good to me, too, except that you have to know who "the industry" actually is. So I'll give you an
example: For a wager made via TVG by someone in Louisville, Kentucky, on a race at Churchill Downs, a
sizeable portion of that 14 percent ends up being split 50/50 with Churchill Downs and our horsemen,
and some portion goes to the other Kentucky tracks. TVG gets the balance of about 5.5 percent. And
frankly that model works.
Unfortunately, most of the people who bet Churchill Downs' races don't live in Louisville or even
Kentucky. And, when that wager is placed somewhere else via TVG, only about 3.5 percent comes back to
the host track, and that's split 50/50 with horsemen in the form of purses, leaving both parties with
1.75 percent of each dollar wagered. TVG still gets their 5.5 percent. But, what about the other 11
percent that's returned "to the industry"?
Well, if the wager is placed by someone living in, purely for illustration, Spokane, Washington,
Emerald Downs gets it. True, TVG has returned the money "to the industry," but directing so much of the
takeout, actually the majority share of the takeout, to someone who neither takes the bet nor puts on
the race is a fatal flaw in our or, frankly, in any business model.
Problem number three: The current ADW model costs too much for what it delivers.
This ADW model consists of two parts. There's the online and telephone wagering part, let's call
that the "dotcom" part, and there's a television part, or "TV." You can create your own dotcom part
today for very little money. In fact, since our acquisition of the AmericaTab and Bloodstock Research
companies, we now provide the dotcom part for ADWs operated by Tampa Bay Downs, Northfield Park,
Oaklawn Park, and Mountaineer Park's Scioto Downs.
And, other technology providers are out there doing the same thing for other ADW sites, which leaves
us with the TV part.
Now, I fully respect the investment that TVG has made in their television programming and
distribution over the last decade. Unfortunately, it hasn't done anything to grow handle or consumers'
spending on Thoroughbred racing.
And, I'm not eager to continue to subsidize those efforts going forward, particularly since, should
TVG sell its television network, I doubt that any of those sales proceeds will return to our industry.
Now, one thing I've learned in the year that I've been with Churchill Downs is that our industry
loves television. I roughly estimate that via the NTRA, Breeders' Cup, TVG and HRTV we've spent
something on the order of $500 million buying television over the last decade.
Yet, in my view, 10 years of televised racing hasn't moved the handle. With the exception of the
Triple Crown, Thoroughbred racing consistently pulls Nielsen numbers in the zero-point-something range.
Since viewership is weak, we love to talk about distribution: How many million homes our product is
But, if nobody watches the stuff, what difference does distribution make?
In fact, if distribution was all that mattered, then every ABC, CBS and NBC show would be a huge
hit, and more than a few thousand people would be watching TVG or HRTV at any moment in time.
We are spending way too much on the ADW model as it exists today. Fortunately, a much, much cheaper
alternative exists compared to television delivered over the air, via satellite or via cable. That is
Internet Protocol TV, or IPTV for short.
In my view, this is still a not-ready-for-primetime technology in terms of picture quality. But in
my past life, wandering around Silicon Valley, I saw firsthand how much money was going into IPTV
technology development. And I'm quite confident that it will get much better quickly.
I'll spare you the discussion of technology in favor of just noting that other sports have already
adopted the IPTV model. Some of you may have seen CBS, which showed the NCAA Men's Championship March
Madness basketball games live on the Web again this year. AT&T's Blue Room website showed live coverage
of Amen Corner at this year's Masters. I saw where the National Hockey League just announced that
you'll be able to watch NHL games live next season on the Web. And, when you get back to your computer,
log on to Major League Baseball TV at mlb.tv and you can watch a ballgame live.
Or, if you are feeling really adventurous, you can use their Mosaic feature where you can watch six
live games simultaneously.
Call me crazy, but the idea of watching six races simultaneously sounds like a bettor's dream to me.
IPTV is going to happen and it's going to happen quickly.
Heck, even TVG's parent company, Gemstar-TV Guide, hosts a show called the Online Video Awards that
recognizes the best and most innovative TV programming created specifically for the Web.
So, now that I've spent a little time admiring the problem, what's the solution? I think it's
simple. Let's free up the content market, for both the wagering and TV signal, and let the tracks and
their horsemen negotiate with the ADW providers to secure whatever deal they can reach.
What's keeping that from happening right now? In the short run, it's TVG's remaining exclusive
contracts. In the slightly longer run, it all depends on what Hollywood Park, the New York tracks,
Keeneland, Del Mar and the other remaining exclusive tracks and their horsemen choose to do. If they
want to continue the exclusive model of the past 10 years, then the current situation will continue. If
they don't, it won't.
As we wait for TVG's exclusive contracts to end, I'm sure some of you are asking, "Can't we do some
sort of short-term deal with TVG?" I used to think so, and I certainly hoped so, but I really doubt it
at this point.
TVG hasn't shown any serious interest in working out a content exchange. And, on July 9, TVG's
parent, Gemstar-TV Guide, complicated the situation greatly by putting itself up for sale.
Until TVG's future is resolved, I doubt there's any sort of short-term content exchange deal that we
You say, "Why is that?" Well, what if you're thinking about buying Gemstar-TV Guide. What do you do
with TVG? It accounts for only about 10 percent of Gemstar's total revenue. According to TVG, it's
never been profitable. And, it's a gambling business, which will require the new owners to get
licensed, as required by some states in which TVG operates.
Given that, it's not clear who might buy the business, or what they might do with it after they've
purchased it. You can all probably think of some potential TVG buyers who you would prefer to not see
operating the business. How about Bodog, for example, or any one of the offshore gambling entities with
a lot of cash?
Furthermore, there is no assurance that a Gemstar buyer would even continue TVG's business
considering it's a rather small operation, its lack of strategic fit with the rest of Gemstar, a decade
of un-profitability according to TVG, and the tie to gambling. From my perspective it's probably better
just to wait and see what happens.
Before you ask, yes, we have already proposed and we continue to be interested in doing a
short-term, wagering-rights-only content exchange with TVG that we could rescind upon a change of
control, assuming we didn't like TVG's new owners.
Our offer hasn't been accepted, and no counteroffer has been put forth by TVG.
In the meantime, what about the customer? There's no doubt that we've made the online wagering
business less convenient for some customers. But, I also think that the majority of ADW customers have
pretty much adjusted simply by maintaining two different ADW accounts.
From the industry results I've seen so far, it looks to me that all the major tracks have conducted
pretty strong meets this spring and summer, and total handle isn't much different than it was last
Despite the apparent turmoil in the ADW market, total ADW handle in the second quarter looks like it
increased 5 to 6 percent over 2006. Now, some of you may have seen TVG's ad recently in the Daily
Racing Form in which they claim that their handle on Hollywood and Belmont was up 35 to 36 percent.
These are accurate numbers, but completely misleading. The reason TVG's handle is up on those two
tracks is that bettors couldn't bet on Hollywood and Belmont via the AmericaTab, Bloodstock Research or
Twinspires ADWs, so they placed their wagers via TVG.
Total industry handle and TVG's total handle in the second quarter increased 5 to 6 percent, not 35
to 36 percent.
Churchill Downs' revenue was up for the quarter, as were our adjusted earnings, so we're comfortable
with the current state of the economic situation. And, remember, we just got Arlington Park back on
August 7, where, by the way, average daily ADW handle was up 11 percent over the first part of the
meet, which was controlled by TVG.
We get Fair Grounds back when their meet opens this fall, and we get Calder back next spring.
David and I didn't create this situation. Our differences aren't personal. We're simply trying to
deal with the fact that the original business model under which the industry's ADW business was created
is terribly flawed.
If, instead, it was producing consistent growth in total industry handle, revenue and profits, then,
believe me, both David and I have many more fun things we'd rather be doing.
But, facts are facts. It's not working. And, with the ADW channel currently accounting for 10
percent of total handle today, and growing rapidly, the time to adopt an open and competitive model
that is focused on innovation and growth is now.
Thanks very much for your invitation to be here today, and thanks for your attention.
Alan Marzelli: Thanks, Bob.