Introduction
Professor Michael Porter of Harvard first postulated the Five Forces Model to help explain the influences that shape industry competitiveness. The diagram above depicts the forces and their source. The entities that can impact an industry participant are:
Suppliers
Buyers
New Entrants
Substitutes
Competitors
Others analyzing the Porter model identify that entities such as complementers and governments are missing. In this exercise, complementers will be discussed along with suppliers. Governments, particularly in any wagering business, need to be considered.
We’ll study the US horse racing industry viewed from the perspective of race track operators (tracks). Each entity will be examined to determine the extent of the entity’s leverage upon on the tracks. The objective of the analysis will be to assist the tracks in positioning. The concept of positioning is the key point of Porter.
Suppliers and Complementers
Suppliers provide the inputs which the firm uses to create its product or service. In horse racing the key input is, of course, horses, provided by breeders (horsemen). The majority of horses used in US horse racing are Thoroughbreds and Standardbreds. Other horses used include Quarter Horses, Arabians and Palominos.
The power of horsemen is lessened to the extent that:
§ horses of sufficient quality are plentiful;
§ tracks can offer wagering on the races of other tracks; and,
§ tracks have additional revenue streams, such as slot machines.
The power of horsemen is increased to the extent that:
§ horsemen exercise their right under law (Interstate Horseracing Act of 1978) to restrict the ability of tracks to offer wagering of races across state lines;
§ tracks providing economically viable purses are plentiful and accessible; and,
§ horsemen have the ability to forwardly integrate into the track business.
Typical complementers to the tracks are the off-track betting (OTB) establishments, Advance Deposit Wagering (ADW) providers and race information services such as Equibase. With regard to OTBs and ADWs, these entities can also be viewed as competitors, particularly if they cannibalize patrons that would ordinarily travel to the track to wager.
Buyers (Customers)
Buyers are the wagering customers of horse racing. Horse racing enthusiasts attempt to analyze various factors in an attempt to predict the winning horses. Handicapping allows skilled players the ability to increase their chances of selecting the winning horse. Unlike other gambling activities like lotteries, slot machines and craps, there is an element of skill in predicting the outcome of a horse race. That cerebral activity is an attractant and a detractor from horse race wagering, depending upon the customer preference.
The power of buyers is increased to the extent that:
§ buyers are large or few in number or purchase (wager) in large quantities;
§ buyers wagers are a significant portion of the tracks selling revenue; and,
§ tracks provide a standardized offering such that buyers can find alternative tracks and switch at low or no cost.
Pari-mutuel wagers, either on- or off-track, are the key driver of track revenue. No wagers, no need for tracks or horses. Some tracks have incorporated slot machines and have become racinos, but the horse race wagering remains the lifeblood of the industry.
The amendment in 2000 of the Interstate Horse Racing Act of 1978 permitted betting on horse racing over the internet. This spawned the emergence of ADWs. ADWs generally offer wagering on many racetracks, both in the US and internationally, allowing buyers the choice of alternative tracks at zero cost of switching.
New Entrants
If an industry is lucrative and the entry barriers are low new entrants may enter, increasing the level of competition. For this industry, new entrants can include other tracks, off-track betting (OTB) facilities and ADWs.
Substantial barriers to entry exist with regard to creating a new track. There are significant capital outlays as well as various governmental land use and gaming regulatory permissions required. Depending on the jurisdiction, referendums may be required as well.
Tracks have the following revenue streams common among them: on-track wagering, off-track simulcast wagering on other tracks’ racing, parking, admission and concessions. For those with approvals, slot and table casino game revenues are also available.
Tracks have several revenue streams and high barriers to entry. They seem to be in a good position, but it is an illusion. Of the common revenue streams, the pari-mutuel wagering is the item of interest. Any new entrant only needs to craft a solution to capture pari-mutuel wagering. The large capital outlay to build a track is not necessary to capture pari-mutuel wagers.
Substitutes
Substitutes are products and services that are similar in customer benefit, but are not just the same product provided by a competitor. Substitution can become more prevalent as:
§ buyers find available alternatives;
§ legal and regulatory barriers are removed;
§ technological change reduces the benefit of the product or service; and,
§ buyers’ behavior changes.
Substitute products to horse race gambling are other gambling products such as lotteries and casinos, both physical and online. Since horse race handicapping applies a certain level of knowledge and skill, online sports betting may be considered a substitute. With the takeout or “vigorish” on sports wagers generally less than that for horse racing, sports betting may be an attractive alternative.
There are US statutes that severely restrict the offering of sports wagering by firms in the US. However, several offshore firms continue to offer sports wagering to US customers, regardless of US law. Online gambling may become more prevalent if US law is liberalized, increasing any substitution effects.
Competitors (Rivalry among Tracks)
Rivalry among tracks tends to be regulated by state racing agencies. These agencies divide the available racing days among the various tracks in the state. In many cases, tracks do not have a close physical competitor offering races at the same time. Or, if they do, it may be a “fair circuit” track that generally offers lower quality horses, of hopefully lower wagering interest.
Tracks in general offer the same basic product, horse race wagering and OTB horse race wagering, with the exception of those tracks that are allowed to offer casino games, such as slot machines. With respect to rivalry for off-track handle, tracks with history of high purses tend to attract better quality horses, which tend to stimulate more wagering interest. However, there also is a correlation between the number of horses in a race and the wagering interest on that race. With field sizes of less than 8 horses, the wagering handle tends to drop off quickly.
There is an aspect of indirect rivalry, which is more lack of coordination rather than rivalry. In the US, tracks do not coordinate their race start times such that bettors can have the opportunity to bet on all races. Many races in the US may run within a minute or two of each other, not giving bettors a chance to cash winning wagers on a race on Track A and then betting on the upcoming race on Track B, for example. In other countries, such as Australia, tracks coordinate their start times to maximize the availability of races for betters to reinvest their winnings, maximizing overall wagering handle.
Who Has Power in the Value Chain
Buyers
Buyers have great power. With the advent of ADWs, buyers have a wide selection of racing, both domestic and international, with no switching costs. In addition, buyers can gamble on state lotteries and patronize land-based casinos in many states. Buyers can also use the internet and patronize dozens of online gambling websites that cater to US customers.
Unlike the old days, horse racing isn’t the only game in town when it comes to legalized wagering. Other forms of US gambling have increased in sales, where horse wagering handle is flattening. Although not true in all cases, on-track wagering handle is stagnant to declining. If inflation is taken into account, overall wagering handle growth looks even worse.
Horsemen
Horsemen currently have moderate power, but potentially have great power. Horsemen provide the core input. They also have statutory power to allow various interstate outlets access to track signals and pari-mutuel pools.
Until recently, horsemen have not been aggressive in utilizing this power, but that is changing. They may run the risk of becoming too aggressive if their demands for a greater portion of the horse wagering takeout extend to areas such as track parking, concessions and slot machine revenue. Horsemen also have the ability to move the highest quality horses between tracks to enhance and/or detract various tracks’ race offerings or boycott tracks with substandard purses, amenities, etc.
Horsemen have the potential to forwardly integrate into ownership and operation of race tracks and ADWs. As the manufacturer of the core input, horsemen have the potential to construct a completely vertically integrated offering – horses, venues and wagering outlets. The only barrier to this vertical integration is governmental regulation and antitrust restrictions.
Tracks
Depending upon jurisdiction, amount of nearby tracks and served population area, tracks have low to moderate power. Tracks provide the venues that horses need to race. Tracks and horsemen provide the key inputs to the industry.
Tracks have the ability to limit the access to other outlets to wager on its races. Generally, that isn’t done as off-track wagering is much greater than on-track wagering. Tracks do have the ability to forwardly integrate into the ADW space, which has occurred with Magna Entertainment and Churchill Downs. Tracks theoretically can backwardly integrate into the horse breeding space as well, but complete integration will not be able to compensate for a track located in a market that has a small population, nearby competition and onerous government regulation.
New Entrant OTBs and ADWs
OTBs and ADWs should have minimal power. The current structure of the industry allows OTBs and ADWs to enjoy more power than they may deserve as they are in reality nothing more than a retail channel. OTBs and ADWs have no role in the actual manufacture of the racing product.
ADWs are just websites that tie to the various track pari-mutuel pools. They do need to be approved in the various jurisdictions which they desire to offer wagering services and they do need to pay simulcating and other fees to tracks. Offshore ADWs may or may not be licensed to operate in the US, but may do so anyway. In addition, offshore ADWs are more likely to offer rebates to large-volume wagerers. An ADW is more expensive to develop than a typical website, in the hundreds of thousands of dollars versus hundreds of millions for a racetrack.
ADWs can offer convenient wagering from a customer’s home or office, allowing the customer to avoid having to travel to a track or OTB facility. If the ADW is an off-shore entity, they may offer rebates to large-volume customers. ADWs are new entrants that are a threat to tracks’ on-premises business. It is likely that they do not have as high a margin as tracks, but their overhead is significantly lower, which may make them potentially more profitable.
OTBs are location-based, so they are only as powerful as their overall attractiveness. If an OTB is just a place to wager on horses, it is less attractive than an OTB located at an Indian casino, or Las Vegas casino race and sports book.
References
Mishra, Sam. (2006), Michael Porter’s Five Forces, Retrieved April 26, 2008, from:
http://www.franteractive.com/.
Porter, Michael. (2008, January), The Five Competitive Forces That Shape Strategy, Harvard Business Review, Retrieved April 26, 2008, from: http://harvardbusinessonline.hbsp.harvard.edu/hbsp/hbr/articles/article.jsp?value=BR0801&ml_subscriber=true&ml_action=get-article&ml_issueid=BR0801&articleID=R0801E&pageNumber=1
Silbiger, Steven. (1993), The Ten Day MBA, William Morrow, New York, 319-323.
Tiffany, Paul. (2006, March), Corporate and Product Strategy, Product Management Program 2006, UC Berkeley Center for Executive Development.
Wikipedia.org. (2008, April), Horse racing, Retrieved April 25, 2008, from: http://en.wikipedia.org/wiki/Horse_racing.
Wikipedia.org. (2008, April), Online gambling, Retrieved April 25, 2008, from: http://en.wikipedia.org/wiki/Online%20gambling.
