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Company Perspectives
Youbet.com, Inc. is a technology company that facilitates live events and is focused on entertainment services, network deployment, and event management via a cross-platform environment. Youbet's mission is to be the premier technology and service provider for interactive wagering worldwide. Our goal is to create a widely accessible interactive race and sports environment, filled with rich and exciting content, and to provide unsurpassed service to our clients.
Youbet.com, Inc. is a leading provider of services related to online parimutuel horse race wagering through its web-based application, Youbet Express. Through the company's advanced deposit wagering system, subscribers can place bets on more than 100 domestic and international horse tracks and, on its web site, watch live video and audio feeds of racing events. Youbet.com operates only as an information web site. The state-licensed wagering companies actually place the bets of Youbet.com's customers. Youbet.com generates revenues from transaction fees (typically 5.5 cents for every dollar wagered), subscription fees, and merchandise sales. Through a relationship with TVG, a subsidiary of Gemstar-TV Guide International, Inc., Youbet.com is able to offer its subscribers the ability to place wagers on TVG's 24-hour horse racing network.
Origins
Youbet.com had a difficult start in the business world, enduring years of heavy financial losses as it attempted to develop a viable technological approach to attract the customers it sought. Like any innovator, the company experienced the hardships of having to blaze its own trail, an effort that at times made the company a spectacle, as it realized the path it was taking was leading it in the wrong direction. The potential rewards were massive, however, providing the incentive for several groups of owners and several different management teams to press ahead despite occasionally discouraging circumstances. Youbet.com was chasing the billions of dollars spent on off-track horse race wagering, a form of horse track betting introduced in the late 1970s that became the driving force of the industry. Off-track betting, which included inter-track simulcasts, off-track betting facilities, and telephone account wagering, grew more than 600 percent between the mid-1980s and the end of the 1990s, becoming the principal source of horse racing's growth and accounting for approximately 80 percent of all horse wagering conducted in the United States.
Youbet.com's mission at the end of the 1990s was to become the first online provider of off-track betting services, but the company's predecessor began pursuing bettors well before the Internet became a hub of commercial activity. The company began as PC Totes, Inc., a venture formed in 1987 that became a pioneer in developing wagering systems based on personal computer (PC) technology. PC Totes was one of the first companies in the world to use PC-based technology in a real-time, transaction-processing environment, developing what it referred to as a "totalisator" system to operate the parimutuel wagering systems at horse and dog racing tracks, the only types of sports wagering, aside from jai alai, permitted outside Nevada. The company's system, branded as "PC Tote," included facilities for infield scoreboards, closed circuit television, and various types of customer ticket-issuing systems. PC Tote registered its greatest commercial success at racing facilities in the Far East, but the company behind the system drew the attention of a corporate suitor because of the perceived potential of a PC-based wagering system in off-track applications. By the mid-1990s, PCs were proliferating in the consumer marketplace, presenting a new tool for the public to participate in off-track wagering, which was the theory held by the backers of Continental Embassy Acquisition, Inc. In December 1995, Continental Embassy acquired PC Totes and, concurrent with the acquisition, changed its name to You Bet International, Inc.
You Bet International's first years in business were devoted to developing a product it later abandoned, one of the consequences of playing the part of a pioneer. During the mid-1990s, the Internet had yet to develop into a substantially sized marketplace and the technologies to exploit electronic commerce had yet to mature. The company, using PC Totes' totalisator technology, began developing an online interactive program to permit the transmission of parimutuel wagering information. Dubbed "You Bet!," the software package consisted of a CD-ROM intended to "bring the race track to the desktop" as its 1995 annual filing with the Securities and Exchange Commission noted. The company hoped to attract dedicated horse racing enthusiasts and customers with only a moderate interest in horse racing who were characterized as PC enthusiasts, endeavoring to obtain a percentage of the $10 billion spent in off-track wagering in 1995.
Launching the First Product in 1998
Development of the company's You Bet network commenced in mid-1995, beginning what would be a lengthy research and development phase. A final, systemwide test was completed in December 1997, leading to a limited release of You Bet! in January 1998, when 400 subscribers (primarily computer-savvy handicappers) gained access to the network, enabling You Bet International to further its research work and study marketing issues such as pricing and packaging. In July 1998, the network became fully operational. Beginning in February 1999, one month after You Bet International changed its name to Youbet.com, Inc., subscribers were charged a monthly subscription fee of $5.95. To open an account, a potential subscriber contacted Youbet.com through its web site or a toll-free telephone number and opened an account that was used for the customer's subscription fee and to purchase handicapping information. To access the You Bet network, the subscriber installed CD-ROM software, provided by the company at no charge, and, once the software was installed, gained access to simulcasts from horse tracks, as well as real-time handicapping information. The company made money from its network through subscription fees, fees from licensed account wagering entities, and from the sale of handicapping information. In June 1999, after generating $1 million in revenue during the first half of the year, Youbet.com formally ended the developmental stage of its existence and declared the beginning of its operating stage. The company ended the year with $3.7 million in revenue, but it could hardly claim to be financially healthy. Between 1997 and 1999, the company lost more than $40 million, including a $23 million loss in 1999. Youbet.com ended the decade with an accumulated net loss of $62 million.
The end of Youbet.com's development stage and the beginning of its operating stage did not herald a turning point in its financial health. The company would continue to suffer financially in the coming years as it struggled to find a viable business model and tackled technological issues. Youbet.com also faced legal issues, which either were ambiguously defined or undefined as they related to gambling on the Internet. In late 1999, for instance, the company was dealt a stinging blow by the Los Angeles County District Attorney, when authorities forced the company to stop accepting wagers from California residents in what was perceived by industry observers as a strict interpretation of California law. Youbet.com paid $1.3 million to resolve the problem and moved its server equipment from California to Nevada, but the debacle stripped the company of the momentum it had built up since entering its operating stage. "It came at a time when our company was performing well, growing subscribers well, and more and more were beginning to embrace us," said Bob Fell, Youbet.com's chairman and chief executive officer, in a May 12, 2000 interview with the Baltimore Business Journal. "In that regard, it was hurtful to us."
Although its financial woes and its battle with Los Angeles authorities painted a bleak picture of Youbet.com at the start of the 21st century, several positive developments offered encouragement to the company's management team. Youbet.com, with approximately 15,000 subscribers by mid-2000, ruled the market for online, horse racing wagering in large part on its own, possessing technology that was regarded as more advanced than its best-known competitor, Television Games Network (TVG), a television-based wagering service owned by Gemstar-TV Guide International. Further, the company had decided to abandon CD-ROMs as the means to access its network, deciding instead to offer access through a web-based application, Youbet Express, launched in March 2001, which promised to spur subscriber growth. In May 2001, a significant agreement between TVG and Youbet.com gave the public even more incentive to subscribe to the company's service. Under the terms of the agreement, Youbet.com gave TVG, which owned a 24-hour horse racing channel available to cable and satellite customers, the right to buy warrants convertible to a 51 percent stake in Youbet.com. In exchange, Youbet.com gained the rights to broadcast races carried on the TVG network, a deal that added 81 racetracks in 35 states to Youbet.com's service. Before the agreement, Youbet.com had access to roughly half the racetracks in the country. After the agreement, it had access to virtually every racing facility in the country.
The balance between the positive and the negative factors describing Youbet.com's status was tipped decidedly toward the negative as the company entered the new century. In 2000, its losses narrowed to $1.7 million, but inflated the following year to $14.8 million on $6.3 million in revenue. The company ended the year facing insolvency, teetering on the brink of bankruptcy and in desperate need of sweeping changes. Help arrived early in 2002 in the form of new management, ushering in a new era in the company's development that offered the first signs of financial success.
Champion Taking the Helm in 2002
Charles F. Champion arrived at Youbet.com in March 2002, when he was appointed president and chief operating officer. Formerly president and publisher of Access magazine and a senior executive at Philadelphia Newspapers, Inc., Champion immediately saw a need for wholesale changes at the beleaguered company. "The problem with Youbet was a cultural problem and a leadership one," he recalled in an October 10, 2005 interview with the San Fernando Valley Business Journal.
"It wasn't the engineers. It wasn't the people answering the phone. It was focus at the top," he said. Champion knew he had little time to effect a turnaround (Youbet.com was losing $550,000 per month when he joined the company) and he informed his employees of the urgency at hand, declaring at a companywide meeting that everyone would lose their jobs if the company's condition did not improve within three months. He reigned in expenses by renegotiating contracts and he ordered a marketing study of the company's subscribers. The study convinced Champion to target middle to upscale clientele and abandon the mass-market approach employed by his predecessors. An additional fee was charged, which was credited to a subscriber's account once wagering reached a certain level. "We wanted people to be economically viable for us when they were here," Champion explained in May 16, 2003 interview with Daily Deal. "We skew more upscale to the heavier user. Our people are likely to be more sophisticated handicappers; six percent of our customers generate 65 percent of the handle and revenue."
Champion's efforts produced almost immediate results, earning him a promotion to the chief executive officer post in September 2002. By the end of 2002, Youbet.com's revenues reached $25.9 million, a fourfold increase in one year, and its subscriber base doubled to 80,000. The company posted another loss for the year, recording a $9 million deficit, but the overall operation of the company was regarded by industry observers as vastly improved, particularly the company's gains against offshore entities that circumvented U.S. laws on wagering. "It just became easier and cheaper to use us than to go to some offshore operation that you didn't know much about," Champion said in a September 1, 2003 interview with the San Fernando Valley Business Journal. "We were more reliable and people knew who they were dealing with."
As Champion continued to refine Youbet.com's operations, his efforts yielded the result for which industry pundits had been clamoring, greatly brightening the company's prospects for the future. After registering another loss in 2003 (the year Champion was elected chairman of the board), Youbet.com posted $1.3 million in net income, the first annual profit in its history. Revenue for the year reached $65.2 million, a 930 percent increase from the total recorded five years earlier. Looking ahead, the company hoped to turn 2004's financial results into a consistent pattern and, as it had expressed interest in since its founding, use its horse racing foundation as a springboard for the gamut of sports wagering, including football, soccer, basketball, baseball, boxing, and golf. One of the most important objectives pursued by Champion was the international expansion of Youbet, which promised to deliver exponential growth to the company. "International represents at least half of our potential moving forward," he explained in his October 10, 2005 interview with the San Fernando Valley Business Journal. "Horse racing in the world is at least five times larger than it is in the United States alone. There is also sports out there and casino gaming. International opportunity is very important to us and we're prosecuting it aggressively. Hopefully, you'll see us acquire more international companies like IRG and also some outside horse racing."
Principal Subsidiaries
Youbet Oregon, Inc.
Principal Competitors
World Gaming PLC; Magna Entertainment Corporation; Penn National Gaming, Inc.
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