Racing and slots belong together

February 23, 2005|By Allan Eberhart

IT'S OPEN season again on horse racing as the Maryland General Assembly debates permitting racetracks to become "racinos" - combining horse racing and slot machines. The critics portray racinos as a last-gasp effort to prop up a dying sport.

But in many ways, horse racing has never been healthier. More than 100,000 people regularly attend the Preakness, more than 2 1/2 times the number who saw Seabiscuit beat War Admiral at Pimlico in 1938. There are also now two horse racing TV channels that broadcast races every day to millions of homes throughout the country, and people watching at home can bet over the phone or on the Internet.

The amount bet on racing has increased from $9.9 billion in 1994 to $15.1 billion last year, according to the Jockey Club. This is one reason the profitability of Churchill Downs, a company that owns tracks without slots nationwide, is nearly 50 percent greater than that of the typical publicly traded firm.

So why does horse racing need slots? The answer is the explosion of alternatives to betting on horse races.

Remarkably, horse racing has grown despite the onslaught of this competition. But no business can survive in the long run if it's prohibited from responding to its competitors. In Maryland, the competitive pressures are especially severe because of the racinos in nearby West Virginia and Delaware (and soon Pennsylvania). The success of these racinos has fueled a dramatic increase in purses and state breeding reward programs that are luring Maryland's best horses and trainers to these states.

But isn't it true that many slots players are not horse racing fans? Yes, for now, but the tracks have been introducing innovative products that combine horse racing with slot-type machines. If some slots players remain uninterested in horse racing, so what? How much do you think a vegetarian and a meat-lover have in common when it comes to food? Not much, and yet both types can eat at many restaurants because they have expanded their menus over the years to respond to different consumer tastes.

Some groups object to racinos because they say they are opposed to gambling, or at least the expansion of gambling. But none of these groups appears to be trying to stop our state government from selling lottery tickets or Keno. Opposing the expansion of gambling doesn't get these folks off the hook, because I don't see them opposing the barrage of advertisements that are attempting to expand gambling through more lottery ticket and Keno sales.

Many of these same groups then argue that slots differ from the lottery or Keno because slots can be more addictive. But if you have a problem with gambling, you shouldn't do any form of gambling. Similarly, if you're an alcoholic, don't tell me that you can have a beer because it has less alcohol than whiskey.

Other groups argue that restricting some of the slots licenses to racetracks represents a giveaway. They call for an open bidding process to maximize the price that Maryland receives for slot licenses.

This argument has two important shortcomings.

First, it fails to recognize that Maryland spends millions to fight sprawl - for example, by purchasing farm development rights. If the racetracks were to lose to some Las Vegas casino in an open bidding process for slots licenses, you could expect the cost of fighting sprawl to increase as more horse farms looked to sell out to developers. In fact, governments often impose restrictions on the types of businesses that can receive government licenses or contracts in recognition of costs and benefits that are not accounted for in an open bidding process.

Second, expanding gambling at racetracks is significantly easier because gambling already exists there. Any attempt to extend gambling to new locations is likely to encounter significant obstacles from neighbors. So restricting the bidding to racetracks greatly reduces the logistical problems associated with bringing in slots.

Horse racing in the rest of the country will be fine regardless of what the Maryland legislature does. But racino opponents have successfully promoted the canard that granting slots licenses to racetracks only postpones the inevitable demise of horse racing. Unless this misconception is recognized as such in Annapolis, it may create a self-fulfilling prophesy.

I have lived in Maryland for more than 10 years, and as a recreational horse rider and small-scale horse owner, I am continually impressed with the horse racing tradition in this state. It saddens me to see how politicians in our neighboring states appear to value their horse racing tradition more than many Maryland politicians do, even though Maryland's tradition is so much richer. I hope we get it right this year.

Allan Eberhart is a professor of finance and dean's fellow at the McDonough School of Business at Georgetown University.

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