PAULICK REPORT FORUM brought to you by Breeders’ Cup: PEGRAM UNPLUGGED PART 2
By Ray Paulick
There is a serious side to Thoroughbred owner Mike Pegram, especially when he talks about the current state and future of the racing industry. Pegram’s success in the sport has been well documented through such stars as Thirty Slews, Real Quiet, Silverbulletday, Captain Steve, Pussycat Doll, Midnight Lute, and this year’s Preakness winner Lookin At Lucky, but he’s been equally successful in business.
A 58-year-old native of southern Indiana, Pegram built a large portfolio of McDonald’s franchises, first in the Seattle area and later in Arizona. In the last few years, he’s branched out by opening two casinos in Nevada. Along the way, through his businesses and his own personal experiences, Pegram has formed strong opinions about how to compete for consumers and deliver high-quality customer service in horse racing.
This is the second of a two-part interview with Pegram on the business of racing. If you missed last week’s installment, click here.
When did you get in the casino business?
I started working on the first casino (Bodies, in Carson City, Nev.) in August of 2006. It opened in 2008. We opened the other one (Carson Valley Inn Casino in Minden) earlier this year.
What are some of the things you’ve learned there?
The business is like any other business. It’s a lot like fast food. You’ve got to get your customers in the door, and once you get in ‘em in the door, you’ve got to keep ‘em happy. You’ve always got to keep things fresh.
I’ve had a competitive advantage where I am because we came in and most of our competitors built their casinos in the 1970s and 1980s, when the pit games were the biggest source of revenue. Now, with technology, the biggest income producers are slot machines. We built our plant around what people want—just slot machines. We are keeping it new, clean, and fresh.
How do you keep things fresh?
Those accountants in the old days that came up with depreciation schedules, they knew what they were doing. It’s like McDonald’s, where we have to reinvent and reinvest in ourselves every seven years to stay relevant. Casinos are no different. You can see that in Las Vegas. Those who reinvest in themselves are successful. But look at places like the Riviera, Sahara, and Circus Circus–it’s hard for them to compete. We are all fighting for the entertainment dollar.
My biggest competitor isn’t another casino—it’s the movie theater. We are both trying to attract people with two hours and $20 to spend.
So are slot machines the answer for racing?
Slot machines ain’t gonna bail out racetracks if tracks don’t change the way they do business. If there is one word, it’s affordability. Why do you see casinos giving outrageous value to the consumer in food? It’s because people eat where they gamble, and they gamble where they eat. Bennie Binion (the late Las Vegas icon who operated the Horseshoe Casino) learned that many, many years ago. He was the truest gambler and truest pioneer in all of Vegas.
What does racing need then?
It has to become relevant to the consumer, and by that I mean you can’t have the same old tired facilities. Go and look at racing where it’s been successful: Keeneland is unique because of the area they are in and the time of year, but it’s unique and relevant and fun to the (University of Kentucky) kids. It’s a great experience and it has its own uniqueness. Same thing with Del Mar. People are at the beach, and they come from places like Phoenix and Vegas. With Saratoga, everyone’s wanting out of Manhattan and getting to the country in the summertime.
Those places give people a reason to come. But in the day-to-day grind it comes down to affordability and mixing it up. If you don’t try things that don’t work, you’re not trying hard enough. You can’t be afraid of failure.
McDonald’s can only run a promotion for so long before it loses its zest. Take Hollywood Park, you can’t offer $1 hot dogs and offer that for eight straight weeks. What you’ve got to do is find everyday value, not just on special occasions, but we’ve got to bring value back if you are truly going to compete for the entertainment dollar—and that’s what racing is.
People can come and play the slot machines, and yes it’s gambling, but it’s truly entertainment. If you don’t believe that, look at the new slot machines: you’ve got a “Sex and the City” slot that shows video, you’ve got a “Wizard of Oz” slot that’s got surround sound.
Racing facilities are not relevant to a consumer anymore. Having music, a band, is that a step in the right direction? Maybe. But if that’s the only trick in your hat, you don’t have a very good hat. It’s called innovation, and it’s what racing is lacking.
Hasn’t racing been innovative in some of the new wagers that have been developed—the picks fours, the ten cent superfectas?
Yes, some of the new wagering types have been successful. It’s also kind of neat what they do at Woodbine, Keeneland and Del Mar with the chip in the saddle cloth (the Trakus system that provides an animated running of a race). It can teach someone how to watch a race.
But innovation is what is lacking. Why do you suppose Vegas stays more current than Indian gaming casinos and riverboats? It’s because they don’t have a complete monopoly. Any time you restrict licensing, that’s when you have a monopoly. You’re restricting innovation.
For a long time, racing was the only form of gambling. I knew we were in trouble when lotteries started, and those lotteries hurt horse racing. I was up in Seattle when the lottery came in, and Longacres took a major, major hit. If you can’t make horse racing more exciting than the lottery, you are in trouble.
The reason the lottery became more successful was the number of points of distribution. Now the biggest bang to purses in the last 20 years has been simulcasting, because we had multiple points of distribution or betting outlets. Unfortunately, people were so scared of giving up their monopoly, we’ve built a model that’s killed the sport.
Explain what’s wrong with the model.
Right now, the man that puts on the show gets 3% (of the amount wagered on a horse race through simulcasting). There’s another 12-14% laying out there. That’s not right. That’s like the guy at 7-Eleven selling beer cheaper than the guy who can deliver it to him. That’s what’s broke. The people who are putting on the show aren’t getting enough. There are people cutting up a lot of that money that don’t invest in the industry or put on any kind of a show.
So if you turn the business model right-side up and drive more revenue to the track where the live race is being conducted, can we lower the takeout?
Possibly. But you are never going to get takeout to the level that sports betting is: it would be impossible because you need the revenue going to the tracks and to purses.
Copyright © 2010, Ray Paulick
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Tags: Bodies, Breeders' Cup, Captain Steve, Carson City, Carson Valley Inn Casino, Del Mar, Keeneland, lookin at lucky, McDonald's, midnight lute, mike pegram, Paulick Report, Paulick Report Forum, preakness, Pussycat Doll, Ray Paulick, Real Quiet, saratoga, Silverbulletday, Thirty Slews
June 2nd, 2010 at 10:26 am
EXCELLENT INTERVIEW…………….
I JUST HOPE THAT SOMEONE IN RACETRACK MANAGEMENT IS LISTENING.
JERRY
http://WWW.VOTEFORJERRYJAM.COM
June 2nd, 2010 at 10:55 am
Wow - common sense business savvy regarding horse racing. What a novel concept!
Shows why Pegram’s a success with MacDonalds and as an owner. But even a high profile guy like him can pull together the fractured fairy tale that is the racing industry. It would take a purge of all the old fiefdom interests, installation of a central authority and then the application of smart marketing like Pegram mentioned.
Until the first two happen - talent like Pegram’s just is wasted on the blogosphere with poor schmoes like us. We’re certainly appreciative - but have no power to change the game.
June 2nd, 2010 at 11:15 am
With lots of respect to Mike and what he has done, and is still doing daily, I might differ on a point or two.
First, the “guy putting on the show” is getting more than 3%. Any signal worth betting on is getting 4-5-6% and if it’s online or hi volume player access, it’s 6-7, even 9%. The host tracks are pricing thier signals based on who is buying. Tracks and OTB’s in small markets get one price, major ADWs or hi volume players get quite another. Volume is not respected in the price as much as method of delivery or customer base.
Secondly, who “owns” the customer? If a customer walks into an OTB in CA to play Belmont, whose customer is he? Belmont is not dealing with parking, admission, food service, or janitorial, and not dealing with the facility capital or customer service. So, my point is Belmont is a supplier and the OTB is putting on “the show”. Therefore, the cost of the content should be commensurate and the rate of return to the supplier should be in context of what it costs to distribute that content. That applies to ADW or OTB’s. Tracks get 8-10-15% from bets on track (excluding purse money), as they should. Tracks selling outside their market to distributors who spend tons of money to deliver it must make a profit to do it.
Having said that, many OTB’s do a poor job of managing their business; that’s one reason we’re in the fiux we’re in. ADW’s are better but still have huge costs of operation to do it right. So the distribution issue is not the biggest problem. The model is broken, and in my view the solution is multifold, but the issue is not simply about how much is returned to the track for its signal.
Mike is absolutely correct, in my opinion, that the focus must be the customer. That’s where the soluton will be found.
June 2nd, 2010 at 11:27 am
Mike Pegram confirms what Fred Pope has been advocating - change the Interstate Horseracing law.
Of course, that change alone will not fix things. Everyone talks about need for leadership, but no big guy has the nerve to get up and lead a revolution. All are scared of “The Dinnies” and Dinny knows that.
The people who could save the business are not lacking in business skills or imagination.
They lack courage.
June 2nd, 2010 at 12:01 pm
I agree with increasing the points of distribution with more high class OTW / restaurant-sports bars which will certainly increase wagering on horse racing signals.
But then Mr. Pegram says:
Possibly. But you are never going to get takeout to the level that sports betting is:
would be impossible because you need the revenue going to the tracks and to purses.
There is no need to for racing to match sports wagering’s “vig”.
In the heyday of horse racing the takeout rates were between 8% to 12%.
It is time that racetracks start to reduce the pricing in all the pools for permanent period of time.
That would be an instant attraction for consumers both veterans and novice fans.
Add McNuggets and Quarter Pounders to racetrack Food Courts nationwide
then we’d have a certain recipe for success.
June 2nd, 2010 at 1:01 pm
Pegram says “Right now, the man that puts on the show gets 3% (of the amount wagered on a horse race through simulcasting).”
Why is it that everybody in the industry who seems to think they have all the answers always say that like it’s the gospel when it is a complete 100% lie?
As Mr. True states above, the host prices are nowhere near 3%. CA racing averages at least 6%, probably higher, for their out of state host fee. How can Mr. Pegram be off over 100% on the price of product yet know everything about the problem and have all the answers to fix the pricing problem.
This is why racing is screwed. The guys in charge now are dolts and the guys who are hailed as possible replacements for the dolts seem to think they know everything but actually know nothing. Just amazing!
June 2nd, 2010 at 1:06 pm
” Right now, the man that puts on the show gets 3% (of the amount wagered on a horse race through simulcasting). There’s another 12-14% laying out there. That’s not right. That’s like the guy at 7-Eleven selling beer cheaper than the guy who can deliver it to him. That’s what’s broke. The people who are putting on the show aren’t getting enough. There are people cutting up a lot of that money that don’t invest in the industry or put on any kind of a show.”
When I first heard of what tracks were getting from the ADW’S when they started up, I posted on the racing forums, “taking just 3% was a dumb ass thing for the tracks to do.” When the industry turns a deaf ear to the very people that support the game, nothing good will happen. Why should the players that knew right along what they industry was doing wrong pay any attention to the Johnny come lately’s that now say they have all the answers?? The damage was already done and now the industry has to pull it’s self out of hole and there’s an awful lot of catching up to do. Failure is a sure thing when you ignore or take your costumers for granted. Pegram is right but it’s to little to late.
June 2nd, 2010 at 2:15 pm
Some people like to drink beer in a bar. Some like to drink at home. The brewery has different pricing and distribution for the many ways people like to drink beer. That’s a good situation for selling beer, but no longer applies to betting on racing.
Until account wagering, tracks, otb’s and racing commissions set up a full range of pricing depending on where off-track wagers occurred. California must have ten different formulas based the type of outlet where the bet is taken.
A guy with a phone can walk into any one of those ten different places in CA with a phone, watch their monitors, bet into the phone account and mess up all their good intentions and business models. I understand they can also get around states that do not allow account wagering or think they can block access.
The technology cat’s out of the bag and we need to let the host tracks take wagers direct, because we are kidding ourselves that we can control the customers’ means of betting. That will give the host track a virtual “on track” model, because the tracks can take the bet on the phone or internet direct for less costs than the on-track tellers.
Also, when the tracks can accept wagers direct, it will solve the settlement issues such as NYOTB reportedly owing over $100 million to host tracks.
Technology has rendered a lot of investment and business plans obsolete in a many different industries. Many of the bricks and mortar otb’s will be bypassed, but for racing to have a chance, this would deliver a real world business plan to the host tracks for the first time since off-track betting under the IHA became a reality.
June 2nd, 2010 at 2:18 pm
Above interview and comments demonstrate once again that racing is all about money. Racing can never pass the smell test as long as the plight of its horses is buried under making money off them.
Jonathan Sheppard and George Strawbridge should be “unplugged” next to show you what horse racing should be about if it ever wants to become more popular.
June 2nd, 2010 at 3:23 pm
Always fun to hear different points of view.
Fred, I love your idea, have one company provide the ADW access to all the tracks for a small %, letting each one brand their product, and kill the bloodsucking TVG’s and HRTV’s of the world.
June 2nd, 2010 at 4:57 pm
I am trying to plug into this argument that the tracks are unable to take wagers. Twin Spires takes wagers. What is to keep Lincoln State Fair or Lone Star from forming their own ADWs, and marketing them? And, is this prohibited by the Interstate Horse Racing Act?
June 2nd, 2010 at 5:04 pm
Mike is so on with his opinion on what is wrong with racing, its scary. Racing does not take care of its customer like Nevada Casinos( read The Big Store by Donald Katz explains what mike is talking about ). Innovation is everything and Mike is dead on why Indian Casinos are not as current as VEGAS.
Why should a customer who is going to gamble need to pay $3 for a program,$10 to valet their car, and then pay $6 for a small beer. ITS CRAZY! WHEN WILL THE HEADS UNDERSTAND THIS!!!
June 2nd, 2010 at 5:28 pm
@Ratherrapid … well, in the case of State Fair Park, the NE Supreme Court deemed ADW illegal in the State.
June 2nd, 2010 at 5:48 pm
i feared that regards Lincoln. I tried an internet bet on Lincoln. Unable. But what about, say, Fairmount Park with the St. Louis monopoly, except they are without billboards or highway signs and so you’re unable to find the place. But, FP ADW. Could such an operation take the same % as Twin Spires or does it takes an act of Congress?
June 2nd, 2010 at 6:01 pm
Mike would make Churchill Downs a place to go bet on race horses. I really don’t think he would run his regular players off to bring in a bunch of guy’s that will bet $2.00 to show on a horse and then buy a $5.00 beer. He would treat it like a race track.
Buddy Hogan
June 2nd, 2010 at 8:50 pm
If Mr. Pegrem were correct he should only be keeping 3% of his slot machine hold and giving the rest to the supplier of the all of his gaming equipment. After all they are the ones inventing the show and entertaining Mike’s customers.
In reality it costs alot of money to operate a net receiving racetrack, ADW or OTB system. Most of which support a local horsemen’s group and pay pari-mutuel taxes.
The system really is not broke, it’s just not growing. There are too many other things tugging away at a limited amount of leasure dollars and the “fixed costs” of running a racetrack and feeding horses will never end.
June 3rd, 2010 at 8:13 am
interesting viewpoint by Pegram and others about “competition between tracks and their pricing of simulcast races. it might be useful to remember our own history and why this practice currently exists.
before simulcasting everybody in the sport was fearful of simulcasting because they expected major tracks to corner the simulcasting dollar and thus drive small tracks out of business.
small tracks had every reason to believe they could not compete with major racing circuits. everyone in the industry expected simulcasting to shrink dramatically the total number of live racings venues and result in just a handful of tracks in — newyork, kentucky, florida and calif. naturally that didn’t seem like a good business model for racing.
because of this fear the designers of take out on simulcasting back loaded it so that small tracks who simulcasted major tracks received a good percentage to offset the loss of handle at their own tracks. That worked very well for the small tracks. that is where we are today.
And be careful of what you dream for: do we really want just a handful of tracks owned by Churchill Downs and some other aggregator like penn national or Harrah’s with virturally no live racing elsewhere? that sounds like a reasonable outcome if we change the existing model and front-end load to host tracks.
the solution promulgated by many is overly simplistic and could have dire consequenses for the industry.
June 3rd, 2010 at 9:07 am
#17 Stanley, I understand the concern, but artificially manipulating how the real world operates is how we got to where we are today. We are trying to prop up tracks in areas of small population to the detriment of tracks in our largest markets where the most people live.
We cannot go forward with a structure based upon where the bet is made, instead of where the product is produced. The model in favor of the bet taker is like the failed system of bookmakers in England and Ireland. The difference is the bookmakers take the risks. There are no risks in the parimutuel system we have here, so the bet taker has no reason to receive anything more than a small fee for just taking the bet.
The ability to expand distribution across state lines means whoever can put on the best show for racing should get rewarded for it. That can just as easily be a small track as a big track. The key point is give bettors and fans a better racing product, not to try manipulating the market, which is what is being done now.
June 3rd, 2010 at 10:30 am
Entrepreneurs—not trust fund babies—should be in charge of racing in America. Id rather have one Mike Pegram at the helm than a dozen Ogden Phipps’ or Will Farish’s.