Sports Betting Analysis: Is Churchill Downs Pulling Up Online or Saving Ground?

Posted on: March 14, 2022, 11:24h. 

Last updated on: June 1, 2022, 09:47h.

Steve Bittenbender Read More
Expertise: Legislation, Sports Betting, Horse Racing.

Over the past two weeks, there has been more chatter about Churchill Downs Inc.’s decision to pull away from online sports betting than there ever was about the Louisville company’s actual operations in the market. That may not be factually accurate, but it feels that way.

Street Sense
Calvin Borel wins his first Kentucky Derby at Churchill Downs in 2007. Can the company follow the jockey’s racing style when it comes to sports betting? (Image: Al Behrman/Associated Press)

The announcement Churchill Downs CEO Bill Carstanjen made late last month that the company’s TwinSpires division would be out of mobile sports betting within six months raised some eyebrows. It led to discussions about how a company that had been a leading operator in online horse racing could not be more than a faint blip on the sports betting radar.

The consensus was that Churchill Downs screwed up what seemed to be a sure thing.

Full House Resorts President and CEO Dan Lee shared his thoughts during his company’s call with analysts last week. In referencing TwinSpires position in online racing, Lee said Churchill Downs “had the opportunity to be the DraftKings of” sports betting. Churchill held skins from Full House in Indiana and Colorado.

And then they kind of dropped the ball,” Lee added. “They didn’t step up the way some of these other guys did. They ended up with a minuscule market share, and they were losing money out. So, they’re exiting the business.”

The DraftKings comparison is a bit of hyperbole. There was no way Churchill Downs would ever spend that kind of coin. There also might have been some residual emotions from Churchill Downs beating Full House for the 13th and likely last casino license in Indiana. That was a project the Las Vegas company invested quite a bit of time and effort in pursuing.

The race for US sports betting market share still continues, and yes, Churchill Downs, indeed, could have had a better start. However, just because the company’s backing away now, that doesn’t mean – to borrow a horse racing term – it’s pulling up on the backstretch.

Look at it instead as Churchill Downs is trying to save ground for later in the race.

Churchill Downs Sports Betting Backstory

Churchill Downs’ history in sports betting starts more than a year before the US Supreme Court issued its historic ruling in the Professional and Amateur Sports Act (PASPA) case.

In April 2017, the company bought BetAmerica, an advance-deposit wagering (ADW) site. That would end up becoming the brand name Churchill Downs would roll out for its sports betting product, and it launched in New Jersey, Pennsylvania, and Indiana in 2019.

But off the bat, there were development issues with platform provider SBTech that kept mobile phone apps from becoming available in Pennsylvania and Indiana. That limited online wagering to computers in those states.

Then in April 2020, BetAmerica’s online sportsbook was shut down for three weeks after a cyberattack targeted SBTech data centers. In August of that year, Churchill Downs announced it was changing platform providers and going with Kambi.

At the start of last year, Churchill Downs revealed that it would rebrand BetAmerica to TwinSpires, the company’s highly successful online racing wagering account. It also announced a marketing campaign that included Hall of Fame quarterback Brett Favre as a celebrity ambassador.

But even with the name change, TwinSpires failed to gain ground on competitors. Take Indiana, for example. In January, the state set a record for handle with $500.1 million wagered at the state’s sportsbooks and mobile apps. However, TwinSpires reported a retail and mobile handle of just $1.9 million. The $1.6 million bet through the TwinSpires app was only better than BetWay and BallyBet.

In retrospect, it probably would have made more sense to use the TwinSpires name from the start. It was a brand people were more familiar with, and people would have connected it easily with Churchill Downs.

Horse Racing Doesn’t Easily Carryover

Among ADWs, TwinSpires has led all operators in handle in eight of the last nine years. Last year, according to figures from the Oregon Racing Commission, TwinSpires reported a $2.46 billion handle. That represented nearly 37 percent of all online racing bets and 17.7 percent of all racing wagers in 2021.

However, online horse racing still only does a fraction of the business that online sports betting does. The US online sports betting handle in 2021 was $52.7 billion, according to Front Office Sports, .

In addition, the younger audience that’s been groomed for sports betting isn’t coming from the ADW crowd. It’s coming from daily fantasy, where DraftKings and FanDuel reign. Morning Consult found that people 44 and younger were more engaged in sports betting than older adults, and horse racing doesn’t quite draw a young crowd of regular bettors.

The others who have emerged as sports betting leaders early on in the race are BetMGM and Caesars. Both of those companies have a national casino footprint and dominate the Las Vegas Strip.

All four of those companies have more of an appetite for losses than Churchill Downs does.

Alfonso Straffon, a sports betting analyst and a must-follow on Twitter for anyone interested in the industry, noted online earlier this month that the top US operators combined for $4.5 billion in net revenue. But that came with a $1.9 billion loss on earnings before interest, taxes, depreciation and amortization (EBIDTA).

https://twitter.com/astraffon/status/1498834138740187139

TwinSpires reported net revenue of $433.1 million in 2021, up $17.1 million from the year before. However, its EBIDTA fell from $112.9 million in 2020 to $78 million last year. That was thanks to spending $49.4 million in 2021 on marketing and advertising. That figure represented a nearly $33 million increase from its 2020 spending.

Carstanjen told analysts that the company hoped to use “a variable cost technology model” along with modest marketing expenditures to turn a profit. However, Churchill Downs executives do not see a “secure path” to suitable profitability at this time.

“The online sports betting and online casino space is highly competitive with an ever-increasing number of participants that the states have licensed,” he said last month. “Many are pursuing maximum market share in every state with limited regard for short-term or potentially even long-term profitability.”

Ride the Rail, Save Ground

Churchill Downs isn’t leaving the sports betting game entirely. While it plans to exit online sports betting, company leaders plan to keep the retail operations running. Carstanjen noted they have profitable sportsbooks in four casinos.

So, in some ways, Churchill’s play right now reminds me of Calvin Borel. The jockey became a legend here in Louisville years ago for how he guided horses in the Kentucky Derby.

In 2007, Borel’s Street Sense was next to last and nearly 20 lengths back after a half-mile. Borel had positioned his colt along the rail and eased his way around the pack to challenge for the lead and eventually overtake the field down the stretch.

Two years later, Borel and Mine That Bird were dead last more than midway through the Derby. Sure enough, the same strategy of saving ground and hugging the rail paid off again.

There’s no guarantee that a lane will open for Churchill Downs in the years ahead. However, in the race for market share, there are companies willing to burn cash and get out front. While they’re doing that, Churchill Downs plans to focus on building a regional casino company and expanding its historical horse racing (HHR) position.

If those ventures remain profitable for the company, then in a few years Churchill Downs may have the money and the customer base it can leverage to get back into online sports betting. There’s no guarantee that strategy would work. But it beats how the race was going for the company.