A Vision of the Tote Industry in the Next Five Years
Friday, March 11, 2005
10:45 a.m. - 12:00 p.m.

Mr. Bergstein: There was some controversy yesterday about various responses to the teleconference from London. I am going to start this discussion this morning about the views of changes in racing, which essentially was what Lee Amaitis was talking about yesterday, and in actual essence, what Bob Rapp of Microsoft was talking about yesterday. While he was talking specifically about wireless instruments and what is happening with wireless, developments in hardware and in software, there is hardly any limitation to where that is going and is hardly any time schedule for how fast it is going. The three gentlemen who are sitting here, one way or the other, have to address that problem because it is part of their whole environment. They are Alex Corckran, who is the President of AmTote International, Dave Haslett, who is the VP of Field Operations at Scientific Games Racing, and Joe Tracy, the CEO of United Tote.

Dave Haslett is subbing for Bill Huntley of Scientific Games. Why don’t you start from Scientific Games’ point of view? The subject is the vision of the tote industry in the next five years and you might start with how you and your colleagues at Scientific Games envision it.

Mr. Haslett: Thank you. Good morning. I see we are running a little bit late, so I will keep my comments relatively brief. It certainly is an interesting question and we kind of view it from the point of view of looking at it from three aspects and I will touch base on each one of those three aspects briefly. 

The first one is what we would describe as product distribution. You have no doubt heard from various speakers over the course of this conference about the whole wireless world and where the wireless world is heading and what that wireless world could potentially mean for us. Certainly it is an area that we believe has a lot of potential for the pari-mutuel industry and is certainly one that we are looking at. You only have to, for example, do a search on a place like Google for wireless wagering and it throws out things such as, “goldenpalace.com to launch wireless wagering.” “Windwood Casino, play wirelessly on your pocket pc or palm device. Our wireless casino software allows you to take wireless wagering to the next level.” “The wireless Internet. Enjoy 17 casino-style games in real wireless mode for real money. Now you can wager on your games anywhere, anytime.” So clearly that is a medium that is available today and is obviously developing very rapidly. It represents tremendous opportunity for product distribution. You know, we have the technology today, the devices are out there, the smart phones, the cell phones, the pocket pcs, pda’s, they are all out there. They are widely used. They are commonplace amongst the current generation. Equally the technology behind them is evolving. You have got hot spots that are now available in multiple public places—Starbucks, hotels, and airports. You have got the whole cellular network that is being developed and evolving. Not long ago, you were limited to 56k, and now we are up to 3G, which is a 2MB connection. The net result of this is that it provides opportunities for us to deliver not only the standard wagering application, but a lot of what we call services. 

The next aspect of that is really for looking at moving away from what we refer to as proprietary hardware running currently on our tote systems. These advances are going to allow us to move to common, off-the-shelf hardware and, in effect, the totes as we know it today, will basically just become a service-based architecture and allow us to connect any device regardless of the manufacturer out there. 

The second aspect I will comment on will be the content, and I know you have heard a number of discussions on the content aspects, whether it is from Cantor or someone else. I know Stan opened this discussion commenting on the presentation that they made, but there are companies out there that are looking at the content. The content is going to become important as we start using these new devices to get the distribution channels out to a much wider audience. It is going to require us to look at not only the existing content and how we deliver it and how games are played, but looking at new content. What is going to appeal to these new players? It has to be fun. It has to be exciting. If we cannot do that, then using these distribution channels is not going to have the effect that we would anticipate and we are not going to realize the potential that is available from using these channels. The content is going to be important and it is not just the way we play these games. It is looking at new games. We can certainly learn a lot from the lottery experience, where games are branded and there are second chance prizes. This has been very successful in the lottery world. Looking at how those games can be put onto these distribution channels and put out there, we can begin providing new content for the pari-mutuel market. 

The third area is really looking at moving toward what we refer to as enterprise labeled data senders. A few years back, we had the traditional single site operation where we may have had a system at a racetrack. Simulcasting expanded and we then moved to a system servicing multiple racetracks or multiple events and we have got the hub top operation. We believe that the kind of environment that we operate in is not suitable for that type of operation and we need to move to enterprise label data senders similar to what they use in the financial institutions today. Leading banks, leading stock markets, they all have moved to these enterprise label data senders and we believe that is what the industry needs and that is where the industry should be going.

Mr. Bergstein: Thank you. United Tote’s view, Joe?

Mr. Tracy: That, I think, was a nice summary from Dave. We look at it almost the exact same way. I will just do our rundown from the reverse, starting with the platform. Just to look at the big picture here, the pari-mutuel industry does about $20 billion a year, the average ticket is about 6 or 7 bucks, that includes everything from harness, thoroughbred, quarter horse, so we process 3 billion transactions a year. To do that today, we have about, at peak periods, 70 hubs. 

          A very critical component to all of that is the raw transaction, and what we can do with that transaction. The more we can get those raw transactions into one pool, the more opportunities open up for game development and player analysis, CRM, that sort of thing. What I am talking about is getting away from ITSP and getting away from having raw transactions in 70 locations throughout North America. So that is number one. The tote platform, consolidation of the hubs, host control events, that is all included in our WTP initiatives. 

          The second thing, the way we look at it in our product development hierarchy, is the distribution of product both on-track and off-track. On-track, we thought to make gains there, the first thing we had to do was take the cash out of the business, so United Tote came up with this token card concept we call the Fast Card. It is totally implemented at Aqueduct right now. This enabled us to go to off-the-shelf hardware. Before we could start to talk about new games, faster paced games, more entertainment, more content, we needed to be able to get a device in front of the player. That was not practical if we were talking about proprietary hardware, so we needed to go off-the-shelf, so that was kind of the development process that led to this cash card. The concept is that you go to a track, you go to a cash cage, you give them your money, you get your cash card, and you don’t have to go through the process of signing up and giving your SS# and all this private information. We are just trying to get a card into the player’s hand. Once we have that, we can put off-the-shelf hardware everywhere—on all the tabletops, in all the carrels, along the walls, in the bathrooms, wherever. But the whole idea is to get this device in front of people, because once we have a device in front of people, then we can start to entertain them with new propositions, with content that hopefully engages them, gets them to bet more, and get them more involved.

          With that, the third level is the games. We are very committed to bringing a progressive jackpot game to the pari-mutuel industry. It is the same technique and formula that has been used in every other gaming venue out there. If we look at the lotteries, with Powerball and the Mega Game, if we look at the wide area progressives on the slot machines, it was a normal evolution. People need the jackpot. It is the life-altering prize. It is the dream. It is not the only thing in these gaming models that are used in all these other gaming venues; there are churn prizes that go with it. But we don’t have that jackpot. I know I am very passionate about horse racing. It is my only hobby. I enjoyed listening to the two guys that were up here earlier. I felt the same about it, but to get people to go to the track for $40 prizes doesn’t do it anymore. I would say to you that if there was a $10 million jackpot on the tote board, and someone had a shot at winning that, that day at that track, you would get people to that track. That has been proven out over and over through other venues. What we have here in racing is a lot of decisions, a lot of results, a lot of content, so proper coordination of that and organization of games, displayed properly in a convenient way that is easy to play that is fast-paced and interactive is what I think is what we need to do to get people involved.

          Another development effort on the games is we believe there is major potential in the contest area. If we look at World Series of Poker, which Harrah’s bought, that formula worked. The whole value assessment with contests, and I think this goes to the core of trying to get new players into racing, people like to spend a set entry fee and get a lot of recreational value out of that. If we look at World Series of Poker, there is the jackpot, there is the TV, there is the camera, the virtual reality, they have got a lot of things going for it, but people can start off for $40 and play for a whole day. They can get in for $100 or $1,000 and play for a whole weekend. You take $100 to the track and you could be wiped out in three races. 

Something that we are working on now that we have patent-pending is our contest wager. What we want to be able to do is when you go to any track, you hit a button, the contest could be geared for that race, for that day, they could be geared for three tracks, east coast, west coast, Miami vs. Ohio, however we want to set these things up. There are a lot of things we can do with this whole contest where you limit your wager going in. You are playing at the point of sale. It was great when Bill was talking about the leader board concept, you know, who is the big cheese of the day? Of course, you are displaying all of this information about who won that contest at that race. We think there is a lot of potential with the contest wager.

Mr. Bergstein: Very interesting. So you endorse Bill Hoge’s idea?

Mr. Tracy: Absolutely. 

Mr. Bergstein: Alex Corckran, how about the view from AmTote?

Mr. Corckran: Well, I think it is critical to note the three totes have very similar outlooks on the future. There is one thing going on in the industry which I think is very important, and that is the industry has taken the initiative to let the totes know what they want, and one of the things they want is the ability to open up the platform so that you can utilize some of Joe’s technology along with some of AmTote’s technology and some of AutoTote’s technology, and you are not limited to one specific tote. I think that is critical because in the future as we try to grow the pie, rather than all take a bigger piece of the same pie, the advantage of if Joe develops a fantastic way to have a poker-like game and we develop a game like Instant Racing that is working well and competing in slot machine markets, it is important that tracks have the ability to utilize both and not just have to choose a single tote vendor and go with whatever that tote vendor offers. Going down the road and looking forward, initiatives like the WTP become very important to the industry’s growth because it lets the individual customers leverage multiple technologies instead of a single technology. 

When AmTote looks at its R and D going forward, we have chosen things that we think we are good at and we can sort of look at them in three areas. The first is account wagering and opening our system up to allow any customer to develop an account wagering system, whether it is Woodbine with a handheld device or a win ticket with an Internet device or TVG with a cable device, allowing them all to utilize the tote system to get their product out there. That is the way we are going to grow the pie rather than just fight over the same piece of the pie. 

Along with that comes international expansion. If you are going to sell your product overseas, the account wagering is critical as is the ability to distribute the point of sale in an efficient way, so we are working on developing low cost machines that allow us to put them in European or South American bets shops or Asian bet shops, and/or allow the existing point of sale terminals in those countries to come back into the US totes, which allows Churchill and Magna and anybody else who has the drive to sell their product overseas to bring that money back into the US pools where we have control over the security and the integrity of the pools. 

We have spent a lot of time over the past five years developing a game called Instant Racing, and the intent is to meet that need that non-horse players have to have a more rapid, fast, slot-like experience. Joe talked about converging the horse racing with that type of experience and I think we are going to see more and more games come out. Instant Racing is much more on the slots side, whereas something like Horse Wizard is more like racing. I think you are going to continue to see games come in that middle ground where we can bring in new and younger customers. 

Along those same lines, we are working on supplying a very rich environment to the on-track to our existing customer base. One thing that Magna has been criticized in the press for is the Horse Wizard and how they deployed it at Laurel, but it is critical that we figure out how to find new customers but it is also critical that we keep our existing customers because 80 percent of the bets come from those 20 percent of the customers that are there everyday playing our game. Providing a rich environment on-track for them is critical. So we are going down the road of both allowing our system to talk to any terminal that somebody wants to develop, but also developing a tote terminal that provides much more of an Internet-like experience.

Mr. Bergstein: I feel old sitting in this room. When I listened to Bob Rapp yesterday, I felt older, and when I went to Redmond to visit my son at Microsoft and walked into their campus, I felt not only oldest but antiquated. The point of that is simply that with handheld devices coming into play and the emphasis in racing on youth and needing new players and younger players and of course everybody makes the analogy of the poker success, do the three of you feel that the use of handheld devices and all of the great modernization ahead is possible to create a renaissance of younger players in racing if you utilize it correctly?

Mr. Tracy: I absolutely think so, but I will say that you need to have the game. The proposition needs to be there, the carrot, the dream prize. That is critical for the success. We have had handhelds out there since the late ‘90’s. I think all of us have. They are at our tracks. They are used today. The most popular is that Dania JaiAlai or the folks that like to sit up in the front row, so on-track we have had handhelds using CE first, now embedded, that is really not new. As far as the younger kids being engaged into our betting propositions, I think the games need to be there. 

Mr. Bergstein: Well, I may not have made the point, but when Sams were first introduced, there was a reluctance on the part of a lot of older players because they were not comfortable with computers, but now you are coming into a betting generation that has been raised on computers, so I understand what you are saying about the device itself is not going to provide it. But is there a new element, a whole new wave ahead possibly that could be utilized?

Mr. Corckran: I think that it is clear from Woodbine’s presentation and from some of our implementations and United Tote’s and AutoTote’s that the technology is there to supply that handheld wagering experience. I would challenge the industry to market that in some way. What we have found is the on-track customers come to the track and there are a handful of them that enjoy having their own personal betting terminal at their seat and they play a lot of money and it works very well for them. It has not really increased their handle in a very significant way, maybe a little bit. The challenge is to get it out to new players and away from the track where somebody can play it while they are in their car. You have to have a fan first or you have to develop a game that attracts that sort of play. You have to have one or the other. To the existing fan it is currently a marketing challenge, because the technology is there. To the new fan it is developing the right game or the right experience or the right attraction to the old game. That is the challenge for this industry when my generation is growing up expecting a faster paced game than older generations. 

Mr. Haslett: I certainly would echo those sentiments, but I do believe this whole wireless world represents a tremendous opportunity for the distribution of the product. People out there today are using these devices for more than just making a phone call or storing information. They are taking pictures, they are text messaging, and they are using them to gamble or playing games on them. They are accustomed to these devices. So it is a huge opportunity out there, but it is critical, and I think as my colleagues here have already mentioned, to provide a game that is fun and exciting to them. To take the traditional types of wagers, we know it would be very complicated to educate them and try to get them interested in these games. But the opportunity to develop a new game, put it out on these devices opens up a whole new market for these types of players out there.

Mr. Corckran: There is an additional thing that is exciting about this. Horse racing has a unique exception in federal law, and we are the only form of gambling that could be seen as possibly being allowed to happen from cell phones or handheld devices legally, and the fact that we can do that ought to be exploited. The technology is there and we ought to go after that market because Vegas casinos can’t offer their games on cell phones, but we can offer our game.

Mr. Bergstein: These folks out sitting here are all your customers so they must have some questions or comments about your products.

Atique Shah: So I am a customer for all three of you guys. First of all, thank you so much for your kind comments and open conversation. The question I have for all the panelists is the following: If you were given the chance to change one thing from a tote’s perspective, what would it be, and second, what would be one change that you would demand on behalf of the industry, whether it is the jockeys or the tracks or whoever it may be? Because I have been hearing a lot about the whole industry is not doing this or that, we should be doing this, that, or everything, and I am trying to consolidate my notes, and I would love some leadership from your perspective. What one thing from your organizations you would like to change if given the chance, and two, what was one thing that you would ask the industry to change, because we are, at the end of the day, connected.

Mr. Haslett: It is an interesting question. Traditionally the tote companies, as you are well aware, have primarily been service providers to the racetracks out there, so the tote company’s position has been, we provide your service. This is it, take it and use it. I think we are at a very important crossroad right now where we want to look at working with you in your business and saying, how do we take this business and go further? How do we develop a game in conjunction with the industry that is going to appeal to more players out there? We can lean on experiences that we may have gathered from the lottery world, and we can bring that to the table, and say these are experiences we have got, how can we adapt this into the pari-mutuel world? I think those kind of aspects would be critical in working with you and getting involved with you and your business, and saying how we can take this and go forward together, as opposed to us just sitting there and saying we are purely providing you a service. We no longer just see ourselves as providing you a service. We see ourselves working with you in the business, and it will even come down to looking at examples around the world and looking at how races are actually conducted. You know, does it make sense for us to have a 5 or a 6-runner race? When you look at all the statistics, you are going to say, ‘Well from a business point of view or a gaming or a wagering point of view, it just doesn’t make sense.’ All the research that has been done in the international market suggests that the best wagering opportunities come from a 12-horse race, and so to be able to work with you and say, how do we achieve that? How do we look at the whole product so that we can build games around it, but at the same time make sure the product is going to be supporting those games.

Mr. Tracy: That was the same answer that I had, is a single answer to both ends of your question, more of a partner relationship. I have only been doing this for a couple of years. Most of my experience has been on the lottery side, but the tone is more of a vendor-customer relationship here with these large scale facilities management or contracts, at least what I am used to is much more of a partnership relationship. We are focused on the same goals. How do we affect the top line? How do we grow this business? That best can be accomplished working together, not behind doors. I think that opening that up, sitting down at the table together in reasonable, manageable work groups is the best approach.

Mr. Corckran: I think I will answer another way. I would ask the industry players, particularly the ones working on developing new technology and new initiatives, NTRA, the latest WTP group, I would like to have them come and sit down at each of the three tote companies and spend a day or two and walk through what we have so that they understand what they have and what we can do very efficiently for them and what we are good at and what we are not good at. What I would change about the tote side is I would take the opportunity that we are getting in the next year or two, and that is to allow us to focus specifically on what we are good at, and not constantly demand other things of us that maybe it is better to go outside of the industry to get. For instance, a CRM system, we had a lot of pressure for many years to develop player-tracking systems, and we did it to help our customers, but the totes will never be CRM companies. There are people out there that do this for a living for every industry in the world, so we ought to leverage that. So, ask from the totes what we are good at, and we are very good at processing the bets. Also take the time to come and understand our systems because, you sit through these conferences, and any number of times I have heard people talk about the antiquated totes. Well, it is a very general comment, and there are aspects that are antiquated. We are still using infield boards from the 1950’s in some locations, but they work very well, and that particular track may not be able to afford to buy the latest board, so it is a good solution. It is not an antiquated solution, it is still the best solution. We run our systems on the latest Dell servers and we program our transaction processing database in the same languages that the military uses to do their core businesses, but I think a lot of people in the industry don’t understand that. People should come and see what we are doing so they understand exactly which parts are antiquated and which parts are not.

Audience member: I have two questions. You brought up a good point that we should know what the tote companies are good at, so I would ask each of you what is your company good at? What is the particular thing? The second thing is that as we move into this new wireless or technological, actually as we try to catch up with the rest of the world in this industry, many of the tracks are not equipped with IT departments, full-fledged IT departments, so frequently we look at our interface with IT. In CRM, for example, we look at the tote company as kind of our interface because they are our fundamental data stream. That wager, that one single event, or that person passing the rewards club card, that is the information that we are gathering, and you are in charge of that. In fact, you have total control of that and you give it back to us in whatever fashion you can. It seems to me that so far what I have seen is it is hard getting that information back. So when we are talking about CRM systems, and we say, okay, you recommend going out and buying a CRM system and get somebody that is good at that. So we go out and we hire the CRM and now they have to interface with you. Now getting you to tell them what those table structures are and how they can interface, that seems to be a difficult process to us so far. 

Mr. Corckran: I will go ahead and start. We have made huge strides in the last problem that you have pointed out there. We have what we call real time transaction data feed and it is designed to provide all the transactions from the tote in real time to third party systems, so it makes it very easy. We also spend a lot of time helping those third parties to learn that, so from our perspective, we have worked very hard at that. Your first question is what are we very good at. Well, we are very, very good at recording transactions very quickly, which is what we do. We take bets in all day long. We benchmarked our system at being able to take 8000 transactions per second about five years ago on servers that had maybe a half a gigahertz processor in them. We have not done it since because on Preakness day our single hub, which handles 27 tracks and was taking all the bets coming in from everywhere in the country, never hit more than 200 transactions per second. So that is the kind of thing that I think the industry forgets is that we do very, very well what the totes are asked to do and we are constantly working to improve it. Security has come to the forefront since the Breeder’s Cup incident, and we are also very good at that. We have a staff of three people that spend full-time working on the security of our network, which for a company our size, is a significant amount of people handling the security of the network. We do that very well. We also work sort of on a consulting basis with a lot of our smaller tracks to help them with the IT issues that they might have, but I consider that a separate business. That is not the tote, that is because I happen to be a customer who can offer another service. But from the tote’s perspective, we do that very well.

Mr. Tracy: What we are good at? That is a nice question. I think we all process transactions well. We have enough computing power at Aqueduct to run ten times the world business we found when the engineers did the math when we were up there starting up. Processing the actual transaction, they are small transactions in length and our volume is just not anything that is an issue. Of course we can process the transactions. Where we have invested a lot of our time is in the distribution of the product and it is not just what United Tote was good at, we contracted out this business to companies that we thought were best in breed. We have invested an enormous amount of money with Fluid, who started this process two years ago doing research in the field, studying the behavior of our players at tracks in Texas and California and some tracks on the east coast. I could talk all day about this, but anybody that has used our product…We took all the point of sale terminals that are out there today are static where a player walks up and drills down, “Laurel, first race, two dollars to…” So the first thing that they notice is why don’t we just flip this around and have dynamic terminals where we can tee up propositions. This does a lot of things. It makes it a lot easier for the player, we can present the information in a more entertaining way, and remember we have a terminal in front of everybody, so we are asking them, begging them to bet, we are teasing them to bet more. It also gave the track the opportunity to prioritize their product. In just about every other industry, products have different profit margins to the tracks. In fact, we did a little analysis at Churchill and for every one percent money that can move from a non-Churchill owned product to a Churchill owned product was almost one million dollars a year. So the same way you would not let a Belmont race go off at the same time you let a Churchill race go off, so it allowed the operators to prioritize their product to try to get play shifted on pools, on tracks according to their objectives and it also made it much more entertaining for the player. So Fluid did that on our full-scale wagering terminal, which we believe now, it is four years in the development, it is the very best in breed out there in the world. It has got biometrics built in, a camera built in, it has a proximity detection built in. I don’t mean for this to be an infomercial, but again, we made a huge investment with Industry and Design out in Australia because we felt that they were the very best company to give us this wagering terminal. We know Australia is out in the front in a lot of these areas. In fact, we even contracted with AmTote Australia because we felt that they were the best company in the world to build our reader. 

So distributing our product on-track we think is our strength, but our top strength, I believe, in terms of our differentiator, is our ability to develop games. We have hired people with proven track records that have patented games out there now that are used in other gaming venues that are producing billions of dollars every year. We know there are attributes in these games that will work in any environment, and it is those games that we are trying to incorporate with the proper distribution within the pari-mutuel. 

Mr. Haslett: I think somewhat what the colleagues have said, transaction processing coming in at the basic level. It is what tote companies are good at. It is what they started out with. It is what tote companies were built on originally. You look at the system today, if you consider a transaction to be a selling a bet, cashing a bet, or selling a voucher, or canceling a bet, these systems are handling 5 or 6 million transactions in a day. They are doing it day in and day out, 20 hours a day, across multiple locations. That is what tote companies are good at. We, as an organization, Scientific Games, are in a unique position in that we have a very large organization that deals in the lottery world, and we are successful in many areas in that. We have the opportunities to draw on those successes whether it be in game development, whether it is in developing devices that are useful in the lottery world, and services that are successful in the lottery will be incorporative services. This goes back to some of my earlier comments, where we are at this crossroad now where we want to work with the tracks. We want to get in there. We have seen it work with the lottery world. We have seen it be successful. We want to come and sit down and say what aspects are we good at, what are you good at, and where do those two meet, and how can we collectively drive the business because it benefits both of us if we can draw the top line. As far as the tracks are concerned, certainly the one thing that we would always reach out for is to get an indication of, what are your plans for the future? Where does the track see themselves going? Where do they see the industry going? Which then enables us to take that information, work for the tracks, and develop products and services that are going to meet those needs in the future, rather than us trying to make some assumptions as to what the industry may need and where the industry may be going.

Mr. Bergstein: I raise that exact point from a trade association point of view, of input needed from the racetracks as to what they want, rather than being told what you are going to deliver. There has been talk, obviously, from time to time about industry having one tote system that it would operate as an industry system. I assume, naturally, that you three gentlemen agree, if nothing else, that competitive forces such as you represent, the three of you, are healthy, rather than unhealthy for the industry. 

Mr. Haslett: Yes, competition is obviously healthy in any environment and I don’t think anyone would dispute that, but I think some of the earlier comments that Joe was making, I would certainly endorse, that we do need to look at this infrastructure that we currently have from the point of view of having these 60, 70, 80 hubs, whatever it is out there. Each one is very often doing exactly the same thing as far as all betting on the same cards. I do think that as an industry we should be looking at how to reduce that. Is one the right number, is it two, is it three? I don’t know. We can certainly look at that, but I believe that is the direction we need to move.

Mr. Bergstein: Despite all of the other dire conversation from time to time, I take it that all of you are optimists as far as the next five years are concerned.

(All agree)

Mr. Bergstein: I can’t think of a happier note on which to end not only this conversation, but this entire conference. Thank you all.