5 February 2011

Why Didn't David Willmot Hear Himself Talk

With handle still plummeting across North America, I though I'd bring out a brilliant speech by none other than David Willmot back in 2001 when he accepted The John W. Galbreath Award for Outstanding Entrepreneurship in the Equine Industry. Racing execs everywhere should take live by the observations he made in the speech. it is a shame that Willmot himself didn't live by those words.

In 2001, Woodbine was doing great. Some history, Willmot took over the reigns at the OJC around 6 years earlier. They were on the brink of bankruptcy, unable to compete with lotteries, the Blue Jays, and Charity Casinos which were popping up all over Toronto, Willmot first sold some of the tracks non-income producing (and/or losing) assets (paintings, Fort Erie, etc.), and also got involved in optimizing the payroll.

But most importantly, he lobbied the government to drop their cut from takeout to next to nothing, while simultaneously bring slots to Woodbine which fueled purses. What he failed to do was cut takeout by the amounts he didn't have to pay to the government anymore. This is one major reason that after 2001, business slowed down.

The other important thing he did was start up phone betting which made it very easy to get into internet betting without any delays when the technology was in place.

Yes, Willmot made it very easy for customers all across Ontario and all of Canada to wager on many horse races a day. The problem of course, was and still is very steep takeout rates which makes winning impossible.

Willmot's failure to compete in the first decade of this new century gave medium and large gamblers no choice but to give Betfair and offshore bookies their action. Woodbine lost close to a generation of new bettors, and Willmot could have saved at least half the loss if he had only acted on what he said when accepting the award.

By not taking his advice, Willmot just allowed Horseplayers to lose faster and faster as more tracks are available from just about everywhere to everyone now. But you won't find any Chris Moneymakers' betting the ponies in Canada, at least into a 21% blended takeout rate. And that is the problem. Winners create new players, and hideous track takeouts only creates losers.

Here is his speech:

Thank you, Bob. I am delighted to be here. My wife, who is from Lexington, was editor of the now-defunct Thoroughbred Record when I met her and brought her to Canada. She found the following words of George Bernard Shaw that were often quoted by John Galbreath. Let me read them to you.

“I want to be used up when I leave this earth. For the harder I work, the more I live. I rejoice at life for its own sake. Life is no brief candle to me; it is a splendid torch, which I have got hold of for the moment. And I want to make it burn as brightly as I can before passing it on to future generations.”

When I read words like that, I am so honored to be associated with an award that is named after John Galbreath. As a younger man in racing, I saw him manage Darby Dan, and I saw him operate the Pittsburgh Pirates. The combination of sportsmanship, business talents, and integrity that Mr. Galbreath possessed was astounding.

I couldn’t be happier to be here today, especially to talk to students in this program. I majored in economics and then law, but my minor was history. All my friends say that I am a frustrated history professor. I love to lecture to students, but I won’t go on too long. When I was in college on a Thursday afternoon, I didn’t want to listen to some guy go on about himself. I wanted to get out. "Where is the nearest pub?"

What I do want to talk briefly to you about are some of my earlier experiences as a breeder and horseman, and how I feel about the business. For me, the epiphany came when I went into track management after almost 30 years on the other side of the sport. It was astounding for me to realize that I knew absolutely nothing about the business of conducting horse racing.

The first race I ever saw was the 1964 Kentucky Derby won by Northern Dancer, a huge Canadian hero. That was the day that I fell in love with the business of horse racing. I love horses. I admire their beauty and courage. But what I have always felt passionately about is the business and the challenge of horse racing. Competition. Can you nick your mares better than other people? Can you raise a better horse? Can you train them better? Can you manage their careers better? And will any of that equate to success at the racetrack?

Kinghaven, the farm that I owned with my father – he died in 1994 – and that I have owned since, has bred over 90 stakes winners, a lot of good horses. During those years I spent on the backstretch, I thought I understood what this business was all about. It was pretty simple. You tried to breed a good horse, you managed it, and then you tried to make sense of your income statement. Of course, everybody that showed up at the racetrack was there to watch your horse run.

In 1984, I was appointed to the board of the Ontario Jockey Club – the youngest member of the board. I am now 51, and it says something about the place, and about horse racing boards, that I was still the youngest member until this past year. But after I went on the Board, I, along with many others in the industry across North America, watched racing go into a serious decline. There were lots of reasons and finger pointing about why horse racing was getting into difficulty.

In 1995, the OJC, which was 120-years-old, operated five tracks. In terms of racing days, it was the largest racing organization in the world before Churchill and Magna became holding companies. The Board asked me that year to go in as the CEO. I had been the “angry young man,” and I think they’d had enough of listening to me complain about how we were messing things up. So they said, “If you are so smart, come in as CEO.”

I had been involved in other businesses: insurance, oil and gas, bottled water, and computer supplies. I had managed to turn some companies around and had done well buying and selling them. A friend of mine, once the head of Hockey Canada, another not-for-profit, where there is a lot of politics and nobody has real ownership, said to me, "David, don’t go in as CEO up there until things get really smelly. Because they are not going to let you do what you think has to be done until things get smelly." By 1995, things were getting pretty smelly at the OJC. In fact, they were so smelly that I began to wonder why I was in that business.

I would look out the window at my farm thinking, “Am I nuts to have money invested in this business? It’s a dying, contracting business, and a dangerous place to have your money invested.”

When I went into the OJC as CEO in 1995, we were about three months from having the Bank of Montreal call our loans. My first meeting with them – I remember well – I was asked to go down and meet with the bank. I thought it was an introduction, just one of those get-to-know-the-new-CEO meetings. When I walked into the room and saw these five faces, I knew this was no introductory meeting. This was a “come-to-Jesus” meeting. I was there to be informed by the bank that if things didn’t change, and quickly, they planned to pull the loans.

The unusual thing about the OJC – we have since changed our name and I will talk about that in a minute – the unusual thing about the Ontario Jockey Club is that it is a dual breed organization. Its harness racing product is on a par with the biggest and best in North America, the Meadowlands. Our Thoroughbred racing is not quite that high, but we would probably have about the fourth best product in North America on Thoroughbreds. Between the two arms of racing, there are about 40,000 jobs in the province of Ontario that rely on the business.

So, I felt a huge pressure to try to make sense of this business that was in difficulty. The first thing that I realized, aside from the lecture from the bank that we had better start proving that we were a business, was that I didn’t really know what business we were in. And it is pretty hard to turn a business around when you don’t know what business you are in.

During the first month that I was CEO, I had a meeting with about eight or ten of our biggest gamblers. During our discussion, I used the word “fan,” and talked about our “fans.” And one of these guys looked at me and said, “Don’t insult me.” I said, “Well, what do you mean?” He said, “I am not a fan of anything that you or your rich friends do around here. And don’t call me a "patron" either, because I’m not a patron. Those are people who give money voluntarily, like for the arts. Philanthropically, I am not a patron. I am a gambler. I am your customer and I want to be treated with the respect that a paying customer deserves.”

Since that day, we have never used the terms fan or patron around our company. It is customer. Since that day, everything we have done to turn our business around, and to resurrect horse racing in the province of Ontario, has been customer driven.

One of the difficulties in this industry, and I say this as a horseman myself, is that there has been too much focus on the supply side. This is the side of the business that provides the product, the horses to the tracks, and includes breeders, trainers, and backstretch employees – and I spent years on the backstretch. But there is a demand-side of the business also. The customer, bettor, gambler – who provides the capital; those purses that enable the rest of it to make sense.

Over the years, the thinking in this industry – certainly among management of tracks across North America – has been driven by this supply side. Everything has been, “What can be done for the horsemen. How can we fix up the backstretch? Let’s do whatever the horsemen want. If they want more racing, then we should have more racing, even if that means smaller fields.”

But if you sit down with the gamblers, it is pretty simple what they want. They want field size, they want pool size, and they want low takeout. Frankly, they don’t care if a horse is by Mr. Prospector or Santa Claus. The truth of the matter is, racing is a gambling business 99.8 percent of the time and a sport the other point-two percent. Granted, it’s a sport for a lot of those people who supply the product, but for the industry to work, we have to take care of the customer. I think for decades we have not.

The customer doesn’t want small fields. He doesn’t want “trickle-down economics” like a lot of horsemen do. Horsemen figure, "if we race all year round and have five horse fields, I will pick up enough fourth- and fifth-place finishes that I might make sense of this." Well, racing is still competition. It is not there to guarantee anybody a way of life. You have to be good at what you do, be competitive, in order to provide a product that the customer wants to bet on. And the customer wants things that I just mentioned plus quality racing, but if you don’t give them the fundamentals, five-horse fields of well-bred horses won’t encourage the bettor to bet.

A Philadelphia Park executive said to one of his biggest bettors on Breeders’ Cup Day, “Who are you going to bet on in the Distaff?” He said, “I like so-an-so, and I am watching that race because I’m interested in it.” (I think the race had six or seven horses in it) “But I am betting on the eighth race at Finger Lakes. It has 12 horses in it.”

We have to realize that the customer does not want the same things that horsemen want, and that the customer’s best interests are not served by what horsemen want. But we have to deal with the customer side. Bring the customers back and give them good value for their entertainment and gaming dollar. Only by doing that will we get purses up high enough to make the participants, the supply side of the business, healthy again. It is happening – slowly. Keeneland is dropping its takeout rate. New York is dropping its takeout rate at Saratoga this year. These are terrific signs that a few racing organizations – and I include ours among them; organizations that used to look at things only from the horsemen’s perspective – are beginning to look at them from the point of view of the customer.

So, beginning back in 1995, we adopted a customer-driven philosophy. We lobbied the Provincial government to reduce the pari-mutuel tax, and we were successful after years of trying because we were able to make the argument that the lotteries, the commercial casinos, the charity casinos, the scratch-and-wins, the break-open tickets – all of the things that the Provincial government introduced to compete with horse racing – were being taxed at a lower rate than racing. After years of crying poor, to which the government wasn’t going to respond, we found an Achilles heel, and that was fair taxation. For the first time, when we went to them and said, “We want a reduction because you are unfairly taxing us,” the argument was made, it was accepted, and the tax was lowered. And immediately, some of the tax reduction was passed on to our customers through a lower takeout.

At the same time, we had been lobbying very hard to get the enabling legislation for slot machines at racetracks. It took us three years of negotiating with government on the final deal and the entire industry had to hang together for the Province to agree to a deal that was fair and a true “win-win” scenario for government and the industry. The fact of the matter is that slots are merely a second product line at an existing gaming destination. They don’t create an expansion of gaming locations. This is a politically safe and socially responsible way for government to raise more gaming revenue without introducing more gaming locations in a jurisdiction.

The key is to try and convince government and to be proactive. I think this is one of the challenges that Kentucky has. The key is to convince the State or the Provincial government to put expanded gaming in the racetracks only; don’t put VLTs or slots across the road in bars and restaurants or casinos. That will hurt the horse racing and breeding business. With slots, yes, there is additional capital for purses, which brings back financial health to the business, but you also bring more people back to the track…customers that you can then convert.

Now, a lot of gaming consultants, and you have one on the faculty of this university, will say that racing is cannibalized by slot machines and that you cannot cross a slot player over to racing. But we believe that we are proving every day that that is not true. When we brought slot machines into Woodbine and Mohawk, our two tracks, we physically integrated the machines in such a way that no one coming to the slots could not be exposed to horse racing, as opposed to going in and out for the slots and not knowing they were at the races.

We built or modified our plants in such a way that slot players, whenever they go for a walk, find themselves on an attractive racing floor. We spent millions improving our racing floors so that when slot customers went up the escalator, they didn’t walk out onto what we used to call “1956 industrial Woodbine” – gray steel pillars, gray walls, stereotypical racetrack, cigar-smoking guy standing in front of the TV saying things you don’t want to listen to and throwing paper on the floor. We completely renovated and rebuilt our tracks so that they were modern, clean, safe – we beefed up security, and barred about 50 of the worst actors. Incidentally, since we’ve done this, female attendance is up about 40 percent and families are coming back.

We want customers to have a very entertaining experience in attractive surroundings, and to feel they are getting really good value for their dollar.

At one of those early customer meetings, that gambler I told you about, said, “For years, what you guys have done for those of us who want to bet on the horses, is drag us in, turn us upside down, shake the money out of our pockets, and then kick us back out. And you think the only reason we are here is to watch you, your friends, and your brown furry animals enjoy your elitist activity.”

Those are pretty harsh words, but he was right. That is how customers at racetracks have been treated. They’ve been dismissed by management as people who will be there no matter how they’re treated. Well, we spent $120 million on our tracks, which was funded by turning our business around, by bringing people back to the tracks, by restoring the confidence of our bankers, by the general turnaround in the industry, and by the prospect of slots. We created facilities that a lapsed customer would come back to and feel comfortable and that a new user would come to and say, “This is not what I expected from a racetrack. This is very nice.”

At the same time, we realized that we had to distribute our product off-track. Our TV department now has over 100 people in it, which makes it as large as a station in a large city. We have gone out on three platforms. We have gone out with what I term hard-core, medium, and soft-core distribution of our racing product in Canada. The hard core is The Racing Network Canada (TRNC). The TRN in the U.S. went broke competing with TVG for several reasons, including a high cost of distribution. TRN Canada, which is owned 100 percent by our company, has been very successful. In just three years, our telephone account betting has grown from zero to $60 million, and it is because we are putting our product into the home. If you have TRN Canada, you basically get barraged with racing and betting information.

Our soft-core product is SportsNet, where we have a lot of racing on basic cable. It is more the TVG style; that is, explaining to people how to bet, although they don’t use horseracing jargon. They wouldn’t talk about a horse running for a “tag.” If you had never watched a horse race, what does it mean? A dry cleaning tag? What’s a tag? So that product is much more geared toward exposing racing and converting new people to racing.

In the middle is full-card simulcasting. We have 426 live race programs a year, so we have a lot of product we send out to various simulcasting networks across North America.

You folks are obviously in this program because you are interested in the business side of the equine industry. For those interested in racing, the opportunities for skilled management are endless. As the industry starts to turn around, the opportunity for exciting and challenging employment is growing dramatically.

In our company, the Food and Beverage Department has 450 employees and does $30 million a year in business. Our Television Department has over 100 employees. There are more than 400 employees in the Mutuels Department. It goes on and on. We have 26 teletheaters, which is another department. So, there are a number of different areas that you could look upon as a potential career opportunity, and those are in addition to the racing departments. Presumably, you like the equine industry, and may like being involved with horses. But the business of racing needs capable, bright, young people who have had formal business education.

For years, racing used to rely on people coming up through the backstretch for the management side. But we are desperate for bright, young people who can come in and look at the horseracing industry as a business. Who can understand demand side and supply side and what has to be done in the way of marketing. You have to understand your product before you can sell it, and you had better understand whom your customer is before you can sell that product to them.

We have an incredible opportunity in horse racing today. We have the bubble of the baby boomers for the next 20 years. Racing probably has the best demographic of almost any business in North America in the sense that it is basically 45-year-old-and-up people who have disposable income and discretionary time for racing. I’ve heard people say we need to get more young families out to the races. But I know that when I was younger, going to the races didn’t make an awful lot of sense. Our two kids did not want to go and we were too busy.

We have a great demographic. If we can build on that demographic, give them what they want, give them security, give them good transportation, give them good food, give them good surroundings and give them good racing product that is based upon all the fundamentals of what a good gambling product is, we can succeed. If we are ever going to expand horse racing, if it is going to regenerate itself, then we do have to bring new people into the business.

A few years ago, Andy Beyer referred to racing as “a gambling game.” I believe it is more often that than a sport. It is a sport on Kentucky Derby day, and on Breeders’ Cup day, or on Queen’s Plate day at our track, but it is not a sport most of the time. Most of the time it is gambling. A $20,000 claimer on a Thursday afternoon is not a sport. Jerry Bailey may be brilliant when he wins the Breeders’ Cup on a horse, but he is a bum when he gets beaten on a 4-to-5 shot in a $20,000 claimer on Thursday. At that moment, he is not a sports hero. He is simply a means to a gambler winning his bet, and if Jerry blows it, that gambler is very upset.

So, we have this hybrid between sport and business. Over the years, by convincing ourselves that it was purely a sport, we let the business slide. We lost track of those people who come to the tracks, why they come, what they want by way of product, value, and entertainment for their dollar. I believe we are starting to bring them back and I think we have to just not be naïve about what brings them back.

We have two teen-age sons, 14 and 16. If I am watching TRN Canada at home and they walk into the room, they will ask, “Do you like anything?” If I say, “No, I’m just watching,” they are gone out the door. But if I say, “Yeah, I like the five horse in this race,” they’ll ask, “Can I have a piece of your bet?” They will sit and watch with me because they have $2 or $5 riding on the race. Even though our foaling barn is 50 yards from our house, our sons have not taken much interest in “the horse” or “the sport,” but they like to gamble. We can talk about juvenile gambling, but forget that. They are going to be on their own soon and I want them as customers.

So the fact is, we have got to attract the next generation of fans by making it a fully and excitingly interactive in-home product. I don’t think with conventional marketing that you can get many people who have never been to a racetrack to go.

We have to get people out to the tracks for reasons that are necessarily associated with racing. They have to come out because the food is good, and the ambiance is good. They feel the entertainment experience as well as the racing experience. We will soon have fully interactive in-home wagering where the picture comes up – you put up your account – you build your bet – you place it – it is automatically credited or debited. When that kind of legal in-home wagering becomes common, I believe that young people of today, who are computer literate, who love that interactivity, will start betting on racing just because it is a gambling game.

Ultimately, they may become interested in the horse and the sport and will one day ask, “Why don’t we actually go to the track and see what this is like live?” I believe that is the way to bring new fans to the racetrack. But when they get there, they had better be able to find a combined entertainment-sport-and-gaming product that will satisfy them. At the very least, the track can’t be so empty that they walk in and say to themselves, “What’s wrong with me that I am here?”

People are coming back to tracks today and it’s a challenge. It is going to be a long row to hoe, but I think racing is over its worst days and has its brightest days ahead.

When I started as the CEO of the OJC, we had negative cash flow of $10 million. Today, we have positive $40 million in cash flow. In terms of perception, our name sort of fit our management. We were the Ontario Jockey Club, a bunch of elitist, self-perpetuating, self-appointed guys, running their horses, and hoping the public came and bet enough money that they could make sense of their “elitist activity,” as that gambler told me. We have now changed our name to the Woodbine Entertainment Group. We are not-for-profit, but we don’t think of ourselves as not-for-profit. We are a business with over 3,000 employees that does $1.3 billion a year.

Today, just the change of name evokes for customers and potential customers the fact that we are an entertainment experience and not an outdated club. Our vice-president of human resources was meeting with the Deputy Minister of Labor, and when she put her business card in front of him, he said, “How many jockeys are in your club?” So we changed the name to change the image of racing.

Thank you very much for having me today.

A couple of final things. Willmot did drop takeout on doubles and exactors around 2000 by a point. The thing is that the government gave the track around a 6% cut. The good majority of it was split between the track and the horsemen and not the bettors, though some more was given to larger bettors through a very minor rebate program through their betting account system.

I'm hopeful, new Woodbine Chief Nick Eaves will actually follow through on Willmot's superb ideas and observations (the one's I highlighted as his crystal ball was way off when speaking of the future). There are indications that he is as Woodbine handle bucked the trend last year (allowing the big rebate shops to take the signal, getting TVG to feature them, and also being placed in the Eastern edition of the DRF is why). Domestically they still sucked DB's (the first initial is Donkey), as they are priced too high as a competitive form of gambling, though they look like they are starting to get it (the change of direction on their Racing Show on The Score) as they realize that nothing has changed since 2001, 1981, or 1931: Horse racing is fueled by the bettor. The bettor is the customer, not the fan, not the horseman.

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