Can Slot Machines Rescue Horse Racing?

Racinos attract more bettors--and fatten state purses

Attendance at the nation's racetracks has been declining for decades, leaving busted, empty tracks across America. Sales throughout the Thoroughbred breeding industry are faltering. And more than 30 states face a budget crisis this year.

What's the connection? All three problems have one solution, say some racing enthusiasts and track financiers. And that solution isthe racino.

Racinos, tracks that have slot machines or video gambling terminals, have opened in six states--Delaware, Iowa, Louisiana, New Mexico, Rhode Island, and West Virginia--since 1999. New York's Aqueduct Racetrack, a subway ride from Manhattan, has permission to add up to 4,000 video terminals, but it hasn't figured out how to make money after the state takes its cut. Maryland and Pennsylvania are mulling legislation that would allow racinos, which account for much of the recent increase in betting on Thoroughbred races--up 12% since 1999, to an estimated $15.3 billion this year.

Here's how racinos work, and why fans, breeders, and track owners like the idea: Racetracks install slots, generally thousands at a time, on-site. Racing fans, presumably between races, spend a few dollars on the slots. The income made by the track, after sizable payouts to the state and the lottery system, is funneled back in the form of bigger purses for each race. The difference between a racino-funded purse and one without slot money can be as much as $175,000.

Big purses mean bigger paydays, attracting owners with better-performing ponies and creating more competitive races. In theory, that pulls in more bettors--many of whom use off-track and Internet outlets. So even though attendance is down, tracks, which get a portion of every bet, make more money. "You can take a nonprofitable track and make it profitable," says Jefferies & Co. gaming analyst Lawrence Klatzin. "[Racinos are] saving a dying industry." Indeed, the prospect of more racinos is helping to drive a consolidation trend. Magna Entertainment Corp. (MIEC ) in Aurora, Ont. has bought five tracks in the past year, including Pimlico in Baltimore.

Some states have already become reliant on the income racinos pull in. In West Virginia, some 10% of the annual budget of about $2 billion now comes from racino and other gambling. That infuriates antigambling lobbyists. "You cannot gamble yourself out of a business problem," says Glenn Thompson, executive director of Stand Up For Kansas, a group resisting a push by track owners there to turn their dirt miles into racinos. Although the tracks bring money into state budgets and the racing industry, they suck it out of surrounding communities, Thompson argues. Most racinos are not destination spots--they're frequented by locals. Says Thompson: "85% of the revenues will come from a 50-mile radius." That means other businesses get less.

Then there's the obvious drawback--more gambling. People who might not have come to the track are attracted by slot bonanzas, and die-hard rail birds are spending more money. Slots are much more addictive than the ponies, say gambling addiction experts, because the time between bet and payoff is so much smaller.

The recent Breeders' Cup scandal may do some harm to the very notion that the industry needs saving. On Nov. 20, one of three former fraternity brothers charged with rigging bets on the Oct. 26 Breeders' Cup to capture $3 million in prize money pleaded guilty. The three--one of whom worked for Autotote, a company that processes computerized bets--allegedly used phone accounts and a computer to pick the winners in six consecutive races. Former New York Mayor Rudy Giuliani and his consulting firm have been hired by the National Thoroughbred Racing Assn. to review the industry's electronic wagering system and help secure it.

That's important because odds are the number of racinos will grow. "As the economy becomes more uncertain, people play more games of chance," says Michael Tew, a Bear, Stearns & Co. analyst. Besides, to strapped state governments and troubled tracks, racinos look like a sure thing on the daily double.

By Heather Timmons in New York

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