Youbet’s hopes riding on races’ horsepower

When the horses break out of the gate for the Breeders’ Cup at Santa Anita Park this weekend, online wagering company Youbet.com Inc. will have a big bet of its own riding on the races today and Saturday.

Youbet, the only publicly traded horse-betting outfit in the U.S., is counting on the event to be its biggest revenue generator of the year, topping the $7 million wagered for the cup last year.

That would help the company continue to emerge from a losing streak that included annual losses for three of the last four years, the costly acquisition of two gaming-related companies, a federal investigation and nearly getting delisted by the Nasdaq stock market.

Youbet is facing a shrinking marketplace as tracks close and playing the ponies becomes less popular. Just a fraction of the billions spent on horse-betting is online, and the company faces competition from several rivals.

But a little more than a year after shuffling its top executives, Youbet appears to be on the rebound. It has posted a profit for the last two quarters, and its share price -- although volatile -- closed Thursday at $2.32, up sharply from a 52-week low of 77 cents a year earlier.

“We want to make sure we shine our absolute best this weekend,” said David Goldberg, Youbet’s chief executive.

Michael Silber is among those rooting for the company. He said he uses Youbet at least twice a week and often follows multiple horses on the site, betting on them as they race at tracks around the country.

“They give you workout reports with more detail than anyone else,” said Silber, who owns toy and bobblehead manufacturer P-Squared and lives in Los Angeles. “You can watch two races at once. You can watch replays of races. You can see a horse’s entire history, a jockey’s entire history. It helps you make smarter bets.”

Analysts say the company erred in two 2005 acquisitions: United Tote Co. and International Racing Group.

United Tote, which manages the equipment used by race tracks to place bets and calculate odds, contributed $11.2 million in losses to Youbet’s bottom line last year and $18 million in loses in 2007, according to Youbet’s regulatory filings.

International Racing Group, which provided telephone betting services, was even more trouble. Youbet closed the division last year after a federal investigation found that IRG was being used in an illegal book-making operation, although neither IRG nor Youbet was accused of any wrongdoing.

With International Racing Group out of the picture, Youbet should now sell United Tote, analysts said.

“United Tote is not core to what they do,” said Mark Argento, an analyst at Craig-Hallum Capital Group. “It’s very capital intensive, and it’s not growing -- it’s declining.”

Selling United Tote is paramount to the company’s attempts to reboot as a true e-commerce business, said Michael Crawford, an analyst at B. Riley & Co.

Goldberg was hired in October of last year as the company’s chief operating officer and moved to CEO in June. Previously, he was executive vice president of global music services at Ticketmaster Entertainment Inc.

Executive Chairman Michael Brodsky joined the company as chief executive in April 2008 and is credited with bringing an understanding of e-commerce to the company. Brodsky previously was a managing partner at an investment firm that owned about 13% of Youbet. The firm, New World Opportunity Partners, was behind Brodsky’s ascension to the position of CEO and later executive chairman.

Youbet’s previous executives came out of the horse-racing industry. Analyst Argento said Brodsky and Goldberg were more suited to the company’s true business because they understood the Internet.

“The horse-racing guys understand horse racing, and that’s a dying industry,” Argento said. “Now, Youbet is essentially e-commerce guys. They understand analytics, how to drive customers to the site and how to build a better, easier-to-use website and platform for betting.”

In September, Youbet launched WhoDoYouLike.com, a website that aggregates messages from Twitter.com -- in real time -- related to different horse racing topics.

Youbet also provides statistics on horses and jockeys, live streaming video of races, and race results to ESPN.com and CBSSports.com in hopes of driving traffic back to Youbet.com, Goldberg said.

“About a year and a half ago, Youbet wasn’t looking so good and people were starting to write them off,” Argento said. “What they’ve been able to pull off since then is pretty impressive.”

But that doesn’t mean Youbet has crossed the finish line.

In addition to challenges facing the horse-racing industry, the company faces stiff competition from other firms.

Youbet’s market share within online horse betting is at 30%, according to the Oregon Racing Commission.

TVG, the online betting house that also broadcasts races on satellite TV, has a 29% share of the market, commission reports said. TwinSpires was started in 2007 by Churchill Downs Inc. and last year recorded a 21% share of the online horse-betting market.

Youbet is pinning some hopes on a bill in the U.S. Senate and another in the House that seek to legalize, regulate and tax other forms of online gambling such as poker and black jack, Goldberg said.

But the two bills have been largely ignored, with no hearings held on either, as lawmakers have turned their attention to pressing issues such as healthcare and the economy.

Executive Chairman Brodsky lives in Washington and has been lobbying lawmakers on getting either bill passed, Goldberg said.

But until laws change, the company’s main focus will be getting more people online and betting on horses, Goldberg said.

“We aren’t looking to replace the race track,” Goldberg said. “We’re looking to complement it.”

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