Churchill Downs Inc. plans to bring horse racing to downtown Louisville.
But unlike the Run for the Roses, attendees will wager on past races, digitally replicated on slot-like machines.
When it opens at 4th and Market Streets, expected by the end of this year, the city’s second Derby City Gaming venue will join a growing array of historical racing machine venues in Kentucky.
Bill Carstanjen, the company’s CEO, said during a public investor call last week that the machines “are a key strategic focus over the next five to ten years” to expand the company’s reach.
“We have developed high-growth, high-margin investments in this segment,” Castanjen said. “We will seek to build on that track record.”
The machines are just one part of CDI’s expansion beyond live horse racing. Even as the company has either introduced or plans to add these gaming consoles in three states — Louisiana, New Hampshire and Virginia — it’s also taken an interest in traditional casinos.
According to annual financial reports, CDI made $1.8 billion in net revenue last year. More than $750 million of that, or around 40%, came from its casinos in states such as Florida, Iowa and New York, since Kentucky doesn’t allow them.
That slice is larger than a decade ago when casinos made up 30% of CDI’s net revenue.
A CDI representative did not respond to requests for comment about the company’s strategic plans.
University of Louisville professor Thomas Lambert studies gambling and the horse racing industry. He said while CDI’s top races, the Derby and Kentucky Oaks, remain successful, the company has had to adapt elsewhere due to horse racing attendance declining. It’s done that by bringing historical racing machines to Ellis Park, its race course in Henderson County.
“Ellis Park used to have a whole lot more races than what it does now. But my understanding is it’s more profitable for them to have the gaming center. That’s where they make their money,” Lambert said.
CDI is also latching onto another potential revenue stream that’s had recent and rapid growth. When the U.S. Supreme Court struck down a wide ban on sports betting in 2018, the company jumped to offer that kind of wagering in states that allowed it.
State lawmakers narrowly legalized wagering this spring, which means Kentucky horse racing associations like CDI can partner with sportsbooks like DraftKings and FanDuel online and at their facilities. No other entities can do so.
Carstanjen said on the investor call that CDI has FanDuel and others to offer sports betting in Kentucky. And he said sports wagering brings in business at their out-of-state properties.
“We actually designed our facilities thinking this may happen in Kentucky at some point,” Carstanjen said. “It’ll be a nice bonus.”
Gaming and gambling
Kentucky’s horse tracks have off-seasons, so live races aren’t run every month. But historical racing machines offer year-round revenue.
CDI’s Turfway Park was the only track out of eight in Kentucky to offer live racing in February. Wagers generated less than $200,000 in revenue, according to the Kentucky Horse Racing Commission, which oversees the state industry.
Meanwhile, nine facilities with historical racing machines in the commonwealth combined for $62.6 million in revenue that same month, with nearly $5 million coming from Turfway’s gaming venue.
Some of those funds go toward boosting the prize money for live races, keeping Kentucky tracks going.
“The purses have helped the industry stay competitive, help get enough horses out for each race. And some of that money is supplemented by [historical horse racing] revenue,” Lambert said.
CDI operates historical horse racing at 11 venues in Kentucky and Virginia, at off-track horse betting sites in Louisiana and plans to introduce them in New Hampshire in 2024. It also runs more than 10 casinos in other states, with plans to open another in Terre Haute, Indiana early next year. Those casinos include “racinos”, venues that combine tracks with gaming.
While gambling machines typical of casinos are banned in Kentucky, historical racing machines are fair game because they’re considered a form of pari-mutuel wagering, which is where participants pool their bets and the host takes a portion of the money.
That form of betting isn’t common in other sports or used for typical slot machines. But local proponents of historical racing machines have argued since their introduction in 2010 that they qualify as pari-mutuel wagering.
In 2020, the state Supreme Court ruled the machines violated a constitutional ban on gambling. Lawmakers in Frankfort, amid disagreements, changed the definition of pari-mutuel wagering to protect their status.
The Kentucky Chamber of Commerce was among the machine’s supporters. John Cox, its director of public affairs, said the court’s decision put jobs related to historic racing machines and the quality of horse racing in a bind.
“Most of the tracks are members at the Chamber, but then also, a lot of the horse breeding [and] training farms across the state, and lots of other ancillary businesses that rely on the success of the thoroughbred industry, of the equine industry,” Cox said.
“To support those machines was somewhat of a no-brainer for us.”
In December, CDI announced an agreement to buy Exacta Systems, a company that provides technology to support historical horse racing software.
Sports betting’s promise
While CDI has a long history of offering horse racing betting, the U.S. Supreme Court’s decision in 2018 opened up a path for it to explore wagering on other sports in states like Indiana, Mississippi and New Jersey.
Since last year the company has said it plans to move away from directly offering online betting for sports other than horse racing on its TwinSpires app. Instead, CDI plans to contract with outside companies like FanDuel to offer online sports betting in Kentucky.
On the recent investor call, Carstanjen said CDI expects to be able to offer sports wagering at its brick-and-mortar locations in the second half of the year, once the Kentucky Horse Racing Commission sets regulations.
“Each of our racetracks and [historical racing machine] facilities in Kentucky already have a sports bar that will be enhanced with sports betting kiosks,” Carstanjen said.
A majority of Kentucky residents favored legalizing sports betting, according to a recent survey. But the issue may not be settled. Martin Cothran, a senior policy analyst and spokesperson for a prominent Kentucky group against gambling, The Family Foundation, argued in a 2020 op-ed that a bill to legalize sports betting would violate the state constitution and require an amendment.
Lambert said he expects the bill to be challenged in court. Cothran said Tuesday that while the organization believes the bill is unconstitutional, it may not pursue legal action.
Supporters see legalizing sports betting in Kentucky as a way to bring out-of-state spending to the commonwealth, but UofL’s Lambert said it could shift how CDI and other local horse racing associations make money.
“There's only so many entertainment dollars to go around at any given time. This may just cause the horse racing gambling to continue, in the aggregate, to go down,” said Lambert, while noting sports and horsing betting attract different age demographics.
But he said he also expects Churchill Downs to pursue whatever the next hot commodity is, such as competitive video gaming and online gambling.
“Who knows, the future could be eSports…The management appears to be flexible enough to continue to adapt,” he said.
