Driving Sustainable Growth: One Year LaterMichael Lamb - Partner, Media & Entertainment Group, McKinsey & Company
Michael Lamb: Thank you, Jason, and thank you to The Jockey Club, board of stewards and senior management for the opportunity to speak to the round table again this year.
We have the privilege in the McKinsey sports practice to work with a number of the leading leagues and clubs in the U.S. and around the world. While each have their own energy and their own followers, nowhere else have we found the combination of excitement, passion, and history that Thoroughbred racing delivers.
It's been a professional and personal pleasure to work with you on this over the last 18 months. Now, a year ago we stood here and painted a dire picture of industry trends and outlook. It's my pleasure to open this year on a more positive note.
First, handle for the first half of the year is flat or up by most measures. Attendance at marquis events is also up. This year, for example, the Kentucky Derby, the Preakness, and Keeneland's Spring Meet all set attendance records.
As we saw so vividly in those videos, for a month this spring, I'll Have Another showed us that horse racing still has the power to capture the imagination of the general public.
Given the experience of the industry over the past decade, this is indeed more positive news. However, all is not well when we get underneath the numbers. We see signs of the industry's continued fragility. First, race days are up nearly 2% over the first half of this year, and this increase in supply accounts for nearly all of the increase in handle. At the same time, average field size at just over eight starters per race dropped a further 2% in 2011. The declines in the foal crop that Jim mentioned earlier will only exacerbate this situation in the years to come and put pressure on our ability to produce a quality product.
While horse racing struggled to remain flat, casino gambling grew 3% last year, even as that industry eagerly awaits the legalization of online poker and casino games, which will fuel their growth in years to come.
Our purses are up almost 8% over the same period, largely on the strength of racino subsidies. Even as developments in Ontario, where the Provencal government has approved a phase out of the subsidy, remind us that this windfall should not be relied on over the long term.
Most importantly, perhaps, the fan base is not yet growing. Our research confirms that not enough fans are coming into the sport. The issues around stigma, integrity, complexity and welfare of the athletes that we identified last year remain a barrier for new fans.
Given the other speakers on the program, I don't propose to go into detail about medication and welfare issues today, but allow me to reinforce our research confirms that addressing these will aid the sport in attracting new fans and obtaining existing ones.
With that context, let us reflect on some of the industry's achievements over the past year. As you heard from Jason, television was an important part of our prescription, and on that front we have a lot to celebrate.
Recall, if you will, the situation just two years ago. The Triple Crown races were split between NBC and ESPN, national coverage of live racing was at an all time low. By contrast, this year will be a veritable television feast for the race fan. The Road to the [Kentucky] Derby, the Triple Crown, Saratoga, the Breeders' Cup, all aired on a consistent home with substantial cross promotion.
There is also reason to see further upside for racing here. Ratings for the recently completed Olympics are up more than 15%, even as online video streaming leaps more than 150%. NBC and their coverage of that event have used all of the networks in their stable, multiplexing across NBC, NBC Sports, MSNBC, CNBC and Bravo, building sports viewership across the same suite of channels they use to cover horse racing.
Sports rights remain highly competitive. Both FOX and Turner have announced their intent to increase their investment in live sports, which bodes well for the value and distribution of racing rights.
The second leg of our strategy last year involved the use of digital gaming to reach new and non fans. Here we should feel confident that we are making investments in the right place.
Do not be fooled by Zynga's recent woes in the stock market. There is still plenty of investment and activity as we saw with Amazon's announcement last week with their entry into social gaming. At the same time, time spent with video games continues to grow and now stands at a national average of nearly 95 hours per year, per person in this country. The efforts of The Jockey Club along with the Breeders' Cup and others are positioning racing to benefit from this tail wind.
Our third major prescription last year involved scheduling coordination and rationalization. Here we can point to a number of very specific positive developments. For example, Santa Anita reduced the number of days to four per week during the winter portion of their meet, driving an increase in field size from 7.7 to 8.3, and a 7% gain in total handle.
Gulf Stream and NYRA coordinated post times in their winter/spring meet, and reported reciprocal handle increases of 44% and 21% respectively versus 2011. There is, however, much more to do on this front.
In the first half of this year, some 45 graded races or nearly 1 in 6 were run within 15 minutes of another graded race. InCompass' recently launched scheduling tools should empower all tracks to improve in this direction in the coming year.
Our fourth major prescription last year was increased information and transparency in the sport. First, I'd like to note that marketing staff at major racetracks have begun to meet to share best practices and determine ways of coordinating for mutual benefit. The first of these initiatives, which Jason mentioned earlier, includes arrangements for sharing video content produced by tracks in order to enable each to engage and excite fans at the local level.
At the same time, TOBA and The Jockey Club have partnered to launch OwnerView, a new tool for owners to provide improved information and transparency into the process and economics of horse ownership.
Since its launch in May, the site has received praise from trainers, owners and syndicate managers. Already, 300 owners, 115 trainers and 35 syndicates have registered, and the site has been visited by more than 24,000 unique visitors.
On three other fronts we have not yet seen the progress we had hoped for, and I mention these today as a reminder. First, fewer race days. Race days continue to climb up, as I said nearly 2% year to date. Coupled with the decline in the foal rate, this will put pressure on the industry's sustainability and deliver a poor quality experience for fans. We continue to believe that the industry's path to growth must be through fewer, better quality races.
Second, ADW innovation. ADW's share of handle continues to grow, yet the ADW experience remains targeted toward hard-core fans, and remains intimidating for new users.
The industry is not capitalizing on the sport's monopoly for legal, online gaming. And while the window is still open today, the next year may see the legalization of poker in one or more states, bringing the competition for gaming dollars online.
Unless the industry innovates and acquires new users now, we fear that legalization of online gambling will accelerate racing's decline.
Third, wagering innovations. There continues to be only little innovation in the wagering product. Promising technologies such as single pool wagering have stalled and efforts in tote innovation and security have slowed. The wagering product and experience today is effectively unchanged from a year ago.
So, while the industry has taken some positive steps forward, there is still plenty of work to do. A fan base takes years to build or rebuild, and reinventing a sport is never going to be achieved in 12 months.
Consider for inspiration the Ultimate Fighting Championships, a mixed martial arts league, which patiently built a fan base over a decade through a mix of television, live events and gaming initiatives. In 2001, that entire league was valued at just $2 million. Eleven years later, the sport boasts a rapid fan base, marquis major sponsors, major network deal with FOX Sports and further coverage in more than half a billion homes around the globe.
What is remarkable about UFC is they achieved this all while facing significant regulatory hurdles. It is still illegal today to hold a UFC fight in New York State, and without the natural advantages that racing enjoys: The family appeal, the cultural history, the passion and excitement that I mentioned earlier.
For that reason and more we are encouraged by the signs and progress of racing over the past year, and we believe the industry is making the right investments in attracting the right talent to execute the next phase of growth.
The road may be long, but steps taken over the past 12 months have laid the foundation for a more sustainable future. Thank you.
Ogden Mills Phipps: Thank you, Mike and Jason. They have both done yeoman's work on this over the last year.
I want to thank Michael and Dan Singer and several of their colleagues at McKinsey who have worked long and hard on this relationship. They have a deep understanding of the dynamics of the sport, and they have been a pleasure to work with.
Before we break for a 10 minute intermission, I want to show a brief feature from yesterday's Summer at Saratoga, telecast on the NBC Sports Network. These telecasts are produced by The Jockey Club and America's Best Racing in collaboration with NYRA and the Cara Hughes Productions.