Los Angeles Business Journal: Youbet.com sees early results in online horse racing gambit

In the race for online horse wagering in California, Youbet.com Inc. has jumped to an early lead. The question is whether the Woodland Hills-based company will have enough stamina left for the stretch run.

Nationwide, the Web site placed over $20 million in bets in January, its best performance to date. Youbet.com also announced $2 million in new financing, and said it was cash flow positive for the fourth quarter ended Dec. 31.

Based on unaudited numbers, Youbet.com recently reported losing $1.3 million in the fourth quarter of 2002, an improvement from its loss of $5.5 million in the like year-earlier period. Revenues rose to $3.2 million from $1.4 million.

Youbet.com investors have reacted favorably. The stock closed at $1.58 on March 5, more than double the 74-cent close on Dec. 26.

A big part of the recent success has been a growing in-state business.

In December, an agreement was signed with Toronto-based Magna Entertainment Corp., which operates the Santa Anita Racetrack in Arcadia. Youbet.com can now broadcast and offer betting on races at all of Magna's U.S. tracks, including Golden Gate Fields in Albany and Bay Meadows in San Mateo.

Year 'round

Before the state legalized online betting on horse racing, Youbet.com had to do business in other states. It was given a license to operate in California in early 2002.

That year, online betting in California generated nearly $200 million, according to the Horse Racing Board. Youbet.com considers it to be the largest market for horse wagering in the country, according to the company's chief marketing officer, Mike Veitch.

Youbet.com started with Hollywood Park and several other tracks whose races are televised on cable TV by Youbet.com's largest investor, TVG -- the satellite broadcasting unit of Pasadena-based Gemstar-TV Guide International Inc. The telecasts direct viewers to place bets on TVG's own gambling Web site, or to Youbet.com. TVG's other California tracks include Fairplex Park. in Pomona, Del Mar in San Diego and Los Alamitos in Orange County.

Business at Santa Anita peaks during the winter months, which combined with Hollywood Park's summer activity, gives Youbet.com more consistent revenue streams than its online competitors.

The convenience of having a one-stop wagering facility for so many tracks is also a selling point. "The track operators know there's an advantage to having all the wagers done in one place' Veitch said.

Crowded field

One difficulty facing Youbet.com is its competition from televised horse wagering services. "They believe consumers are apt to watch video over the Internet, and that business model remains to be proven," said Michael Tew, a gaming industry analyst at Bear, Stearns & Co.

The biggest competitor may be TVG, which garners half the online horse wagering in California. Its investment in Youbet.com serves as an insurance policy in case the start-up draws more business to its site.

Magna also has a Web betting service, XpressBet.

While Youbet.com has been able to spread its bets across multiple tracks, the smart money is on TVG to prevail with its own service. "It will take certain miracles for Youbet.com to survive," said Orin France, webmaster at Hollywood Park.

TVG holds other advantages. At some tracks, including Santa Anita, TVG takes a 5.5 percent cut for every bet placed on Youbet.com. This stems from a May 2001 transaction that also gave TVG warrants to purchase up to 51 percent of Youbet.com's common stock.

TVG currently owns 17 percent of Youbet.com, and taking control of Youbet.com would cost between $35 million to $40 million, according to Mark Wilson, TVG's chief executive.

Other online gambling specialists threaten Youbet.com's niche. Caribbean companies are perhaps the biggest competitors, as they can offer cheaper commissions to U.S. gamblers because of different regulations.

In addition, track operators fear online betting will cannibalize wagering at their tracks. The law that legalizes online betting expires at the end of 2007, and if the operators are sufficiently threatened by online betting, they'll fight to kill it.

"The sunset clause is there to make sure this doesn't become a monster," said Mike Marten, a spokesman for the California Horse Racing Board.

[GRAPH OMITTED]

YEAR (Dec. 31)                2001     2000

Revenue (millions)            $6.3       $6
Total Expenses (millions)     21.5     22.2
Operating Lass (millions)   (15.1)   (16.2)
Net Loss (millions)         (14.8)    (1.7)
Loss Per Share             $(0.76)  $(0.09)