Monday, July 6, 2015

Horse Ownership, Not Really a Business

Since the purse element has been spoken about so often of late, here's an article I wrote for HRU. 

“Horse racing is a business.” “If you want a pet buy a dog.”

 This line of thinking has permeated the sport. When we see partnerships or factory claiming stables, it’s always about making money in horse racing “as a business”. It’s been going on for some time now; probably since slots have dotted the landscape and one could buy a horse for $5,000 and race him next week for a purse of $8,000.

Although in theory it sounds good, it didn’t help horse ownership (in any tangible way that I see), and there is a strong argument that it might have hurt racing overall (the ORC in Ontario had to write rules to stop the “rent a horse” phenomenon, for example, several years ago to protect the horse).

 I don’t think horse racing ownership is a business; I don’t think it ever has been, and the numbers bear this out. It’s been estimated that in Thoroughbred and Harness racing, horse owners collectively lose up to 60% of what we put in. It’s not because your trainer doesn’t know what she’s doing, a driver made a wrong move, there were a few bad claims, or we all can’t add and subtract. Horse ownership never was, and never will be an index fund. Capital Asset Pricing Models, and everything else you might’ve learned in business school fits horse racing like a square peg in a round hole. We as horse owners are dealing with a negative expectation game and always have been. We all know that going in.

I was chatting with a few sharp horse racing friends and foes about that very topic this week. The “Horse Racing Ownership Demand Function” is one unlike any other model or curve I’ve seen. While the components of such a curve for a stock, or buying a new car, or what have you are pretty easy to comprehend, one for horse owners is quite complex.

A break-even point for a horse owner is not just about purses, and if this were not the case no one in his or her right mind would ever own a horse. Purses are clearly a large part of it, because you can only lose so much per year before you say no mas, but in a game with aggregate returns approaching nowhere near dollar for dollar, other parts of the curve are apparent. Here’s what I think besides a dollar rate of return drives the sport, and will continue to in some way, shape or form.

Entertainment value: You can spend $50,000 a year on trips, restoring cars, or anything else for a hobby that has a negative expected dollar return. The hobby or enjoyment part of the equation has to make up the difference of the lost dollars. The same goes for horse ownership. Like playing golf where that one good shot keeps you coming back to pay that $100 green fee, fight traffic and waste a day, that one win, that one trip to a Sires Stake race, that one family outing or the morning’s at the barn, that one time your horse started in a Breeders’ Crown race - it made it worth it.

The Home Run Ticket: A lottery with a $40 million prize pays out about 35% what it brings in, so people collectively lose just about what a horse owner does. That does not stop people from buying a ticket. In horse racing, the “Home Run Horse” is all of our goals. We could own a He’s Watching for $3,000. We could’ve been the one to buy Foiled Again. Chasing that is a big part of the sport.

Ego Value: I was speaking this week to Mike Dorr, a friend who is a racing nut who is a Director of Pricing for a wireless firm. While discussing this topic, he told me Soccer Clubs are started from a grassroots level in the UK, and they can become major players. The failure rate is high and from an investment perspective it’s absolutely bonkers. The ego drives this dream just like you and me trying to get a nice Muscle Hill this fall – who like many others in the ring with him, may or may not even be able to trot - for the low, low price of a fully loaded Cadillac Escalade.

So, I believe the function of a happy owner consists of the above: Some sort of rate of return through purses, the entertainment value of being an owner, the home run horse (where there is a chance to make a whole lot of money), and the ego value of being an owner and competing against others.

What can racing do better in this regard? Well, we can’t do much about purses other than asking for more slots, or gaining more handle. The structure or allocation of purses by class can be discussed and moved forward, but generally purses are what they are. The chances of getting a home run horse are always small, but they’re there and at times this is completely random.

That leaves entertainment and ego. I think racing and racetracks can move the needle with those two parts of our utility curve.

 I was reading Charles Hayward’s Thoroughbred Commentary website  and a story was posted about York Racecourse in Great Britain. In the UK, the money realized from the purchase of horseflesh is even worse than here across the pond, but they really do things well to try and make the ownership experience pleasurable.

From the article: "Racehorse owners are often taken for granted, but not at York. Significant capital investment has been directed at those whose runners make the whole show possible. Since 2011, owners with runners at York have enjoyed the use of a dedicated lounge and dining room, with unobstructed views of the racecourse and parade ring. A recently completed building was also set aside to congratulate connections of winning horses. They instantly receive a USB stick with a still photograph of their winner, together with a DVD of the race. Within a week, winning owners are sent a photograph of the happy occasion within a silver frame. And celebratory glasses are raised not just by winning connections, but by those owning the second, third, and fourth horses home. It’s the sort of experience sorely lacking at other racing venues, and York is committed to extending it to owners beyond Britain. "

Yes this is Thoroughbred racing, where ego and home run horse mean much more than your average fourth race winner at Scioto. But let’s not pretend we as horse owners do not appreciate such perks. Everyone, no matter how big or how small, likes to be appreciated.

 I remember not long ago having a horse in partnership race in the Confederation Cup at Flamboro Downs. The $600,000 race was a big one on the purse side, but as a small horse owner, the little things, not the purse, made this day one I will remember. Chris Roberts, the GM, who is now running the dual Thoroughbred and Harness facility at Northlands Park in Edmonton, tried to do his best in making the event as special as it could be. I remember speaking with him during the week. He mentioned that he was trying to get saddle pads done with all the horse’s names on them, so the connections could bring them home if they wanted. They created a nice spread in air conditioning comfort on a hot day for owners. Everything was done so well from top to bottom and you really felt like a part of something big. Although food spreads are not my thing (I spent the day at the rail with a beer) I loved the fact this little track was going all out.

Our horse came 7th or 8th, but I remember the day fondly (as do my fellow owners), and a lot of it had to do with Chris.

 I don’t want to belittle the efforts of others. The Meadowlands does a great job with this. The Breeders’ Crown makes things special. In fact, I remember attending a post-Breeders’ Crown party at Woodbine one year and brought a friend who owned a claimer or two, but had never bought a yearling in his life.

“This might be a reason to get a Western Ideal next year”, he joked.

So, good things do happen in this vein across the sport. But can the sport do better? I think it can.

 In the end, horse owners sink almost everything they ‘make’ (I use that term loosely) back into the sport. The sport, I believe, needs to sink back more into them. When you are spending hundreds of thousands on yearlings, or hay, or feed, or vets or whatever else comes in the mail with your name on it, you deserve to be paid back with more than a purse check. What can your track do better with its stakes races or overnights to make the event more special to the horse owner? What can the industry do better? Those, in my opinion, are two questions worth exploring.

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