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A New Jackpot in Horse Racing

Slot machines ring in new profits for slumping racetracks. But many states are betting against them

When the crowd gathers at Belmont Park on June 9 for the Belmont Stakes, the third and final jewel of thoroughbred racing's triple crown, most of the attendees will be visiting for the first time and, except for the diehard railbirds, probably won't be back.

Horse racing in North America is facing longer and longer odds. While this year's Kentucky Derby drew the third-highest attendance in the event's 133-year history, as well as a visit from Queen Elizabeth II, playing host to the most ballyhooed event in North American horse racing isn't enough to keep the crowds coming year-round. To attract new customers and boost revenue, Churchill Downs (CHDN) wants to break with tradition and install a new attraction at its Louisville track: slot machines.

Welcome to the "Racino"

Over the past few decades, operators of horse tracks in the U.S. have seen a steady decline in attendance. According to the Jockey Club, the Lexington (Ky.)-based breed registry, on-track gambling in the U.S. fell to $1.7 billion in 2006 from $2.9 billion in 1996—more than a 40% drop. Changes in social attitudes toward gambling, a lack of appeal for young generations, the changing nature of the horse's role in everyday life, and the proliferation of off-track wagering and the Internet are all commonly blamed for the dwindling of crowds.

In the 1990s, a few states began to permit "alternative gaming," largely in the form of video slot machines, in facilities adjacent to racetracks. At places like Mountaineer Racetrack in West Virginia and Prairie Meadows in Iowa, the conversion to so-called racetrack casino or "racino" had a momentous effect: A chunk of profits from the slots went to juicing up the race purses, higher purses brought higher-caliber horses, and the better horses drew larger crowds.

Racinos now have been legalized in 11 states, and they've proved lucrative both for track owners and for state governments, who receive a portion of the newly created revenue. West Virginia, which has four horse and greyhound dog tracks supplemented by slot machines, has had the most success—last year the facilities generated $975.99 million, $445.59 million of which was earmarked for state education costs, tourism, and senior citizens. At least five states—Indiana, Kansas, Kentucky, Maryland, and New Hampshire—have recently proposed legislation to permit slots at racetracks.

Betting on More than the Derby

Churchill Downs is urging its home state of Kentucky to get on board. "We have been working to secure alternative gaming for the better part of a decade," says Julie Koenig Loignon, the company's vice-president for communications. Churchill Downs also owns Fair Grounds Race Course in New Orleans, where slot machines will be introduced later this year.

"The only way to attract new people is to get alternative gaming at the racetracks," says Steven Wieczynski, an analyst with Baltimore-based Stifel Nicolaus & Co. A good investment in the gaming industry right now, says Wieczynski, is on tracks where slot machines will soon be legalized. Though Wieczynski lowered his Churchill Downs stock rating from buy to hold in April, Kentucky gubernatorial candidate Steve Beshear's outspoken support for racetrack casino gambling bodes well for the track operator. Analysts will be eyeing the polls in November.

A larger and even more ambitious proponent of racetrack casinos than Churchill Downs appears to be Magna Entertainment (MECA), based in Aurora (Ont.), Canada. With 12 racetracks around the world and annual revenues exceeding $700 million, Magna has come to occupy a dominant position in horse racing after only eight years of operation. And though a majority of its tracks aren't permitted slot machines—including Pimlico Race Course in Baltimore, Santa Anita Park in California, and Portland Meadows in Oregon—Magna has aggressively pursued alternative gaming revenues.

The Not-a-Slot Machine

Visitors to Portland Meadows will soon be dropping coins in machines that look an awful lot like slots, but technically aren't. Instant Racing machines, first installed in Arkansas' Oaklawn Park in 2000, are an end run around laws that prohibit slots. Because they let players bet on the outcome of actual horse races that occurred in the past, they are classified as games of skill rather than games of chance.

"We realized that in Arkansas we would never get games of chance, so we had to come up with an alternative," says Louis Cella, vice-president of Oaklawn and head of RaceTech, the company that manufactures Instant Racing machines. Thanks in large part to the machines, Cella says Oaklawn Park is "one of the few, if not the only racetrack that has seen daily on-track attendance and daily on-track handle (wagering) increase" over the past decade.

Portland Meadows will install 50 Instant Racing machines on July 1. "It's a product that can emulate the success of [slot machines] in jurisdictions where they're not allowed," says track General Manager Dwayne Yuzik. Legislators in Ohio and Virginia may soon open the door for Instant Racing at racetracks in those states as well.

New Marketing Approaches

Still, some racetrack operators have neither the patience to lobby state legislators nor the guile to implement slot-machine lookalikes. "We're going forward as if [slot machines] are not part of the plan," says Craig Dado, vice-president for marketing at California's Del Mar Racetrack. In 2000, the track undertook a rebranding effort to market itself as a hip, sexy destination for the area's young beach-going crowd. So far, the new image has helped. Between 2000 and 2006, Del Mar has increased on-track betting by more than 4% and attendance by over 16%.

Whether it's Las Vegas-size jackpots or Hollywood-style nightlife, horse tracks across the country are pressed to offer something new. Admits Del Mar's Dado: "We're not pushing horse racing any more, we're selling a lifestyle."

See BusinessWeek's slide show of the top 10 casino racetracks in the U.S.

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