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Battle of the Titans

Who will be the primary provider of iGaming in the United States?casinos or state lotteries? There's a case for both sides.

Battle of the Titans

When the Minnesota Lottery launched online instant-play scratch-off games last winter, it wasn’t long before the critics started howling.

Republican lawmakers led the chorus. GOP Rep. Greg Davids said lottery officials pulled a fast one by going online without legislative consent. “This is the lottery gone wild!” he said. Jake Grassel, of Citizens Against Gambling Expansion, claimed that online lottery games would mean “a gambling facility in every home, library and Starbucks in the state.” Autumn Leva of the Minnesota Family Council weighed in, saying, “Our state should not be involved in predatory gambling.”

In response to the uproar, the House and Senate drafted a bipartisan bill that would ban both online lottery sales and ticket sales at gas stations and ATMs. On May 30—after weeks of turmoil, teeth-gnashing and legislative sanctimony—Governor Mark Dayton vetoed the measure. As he did so, he hinted the real opposition to online lottery games came from a completely different corner: tribal casinos worried that instant-play lottery games could siphon off some of their patronage and their revenues.

“I am concerned that the real impetus behind this bill was not to protect the citizens of Minnesota, but to protect the interests that now benefit from the status quo,” Dayton said in his veto letter. By going online, he added, the state lottery was not attempting to compete with tribal casinos. Like every other business, it was simply using technology to reach more people and make more money.

Do the Indians and other casino operators have cause for concern? As iGaming becomes more widespread in the United States, could state lotteries end up usurping bricks-and-mortar casinos as the primary providers? Three states currently offer legal iGaming. Two of the three, Nevada and New Jersey, licensed the state’s casino industry to run the show. The third state, Delaware, put iGaming under the control of the Delaware Lottery, which also oversees the state’s three racinos. What happens in states with both a strong casino presence and an established lottery?

The Battleground State

Minnesota has 18 tribal casinos run by 11 tribes employing more than 20,000 people. According to the website of the Shakopee Dakota tribe, Indian gaming and other enterprises in the North Star State pay out $1.35 billion in wages and benefits each year, as well as millions in state income taxes.

Not surprisingly, the tribes wield plenty of political influence; in 2012, the Minnesota Star Tribune reported that the top five tribal PACs actually outspent Education Minnesota, the state’s powerful teachers union, and had allies on both sides of the political aisle. If the tribes perceive online lottery games as a threat, they certainly have the means to fight it.

In 2010, the Minnesota Lottery launched online subscription games with little outcry. Critics compare instant-play games to online casino games, in which players play for real cash in real time. But Ed Van Petten, executive director of the Minnesota Lottery, says online scratch-off games will never rival casino games, played online or on-site. For one thing, he says, they’re just not that exciting. And a $50-per-week cap on online play makes it unlikely gamblers would become addicted.

“To quote the National Council on Problem Gambling, online gambling is gambling without everything that makes it fun—the social experience, the interaction,” says Van Petten. “To me, the sale of lottery tickets online is simply a marketing tool and a convenience for those who are unable to get out into the retail environment.” The lottery’s decision to introduce online sales was prompted by flatlining revenues, and the recognition that this is how business is done today; Van Petten noted that 74 percent of people are online daily.

“The opposition came from tribal casinos lobbying legislators in the belief we will somehow become competition to them,” says Van Petten. “They’ve been quoted on a number of occasions that they’re not worried about what we’re doing, but what we may do later. Well, we can’t do casino-style gaming by statute, so I really don’t know what they’re talking about.” 

Up for Grabs

Charlie McIntyre doesn’t see it that way. As executive director of the New Hampshire Lottery, McIntyre says he would be remiss in his duties if he did not pursue the opportunity to offer iGaming.

“When and if I allow the internet to be taken over for gambling, I believe this agency would be less productive and less successful,” says McIntyre, who is also chairman of the Government Relations Committee of the North American Association of State and Provincial Lotteries. “We are one of the state’s biggest funding sources for education. Every buck we don’t make would be a buck that doesn’t go to educate kids.”

The New Hampshire Lottery, which currently offers online subscription games only, broke all-time sales records in 2013, surpassing $278.7 million in total sales, a 10 percent year-over-year increase. “That’s not by accident,” says McIntyre. “We’ve been in gaming for a half-century (New Hampshire’s lottery was launched in 1964). We know what we’re doing and do it pretty well.” He says lotteries are just as qualified to offer iGaming as casinos, maybe more.

“It’s not as if they have this sort of secret sauce; we all use basically the same vendors and the same backup systems to manage wagering, transactions and customer management systems.”

Gaming law expert I. Nelson Rose, professor at Whittier Law School in Costa Mesa, California, points out that online gaming actually originated because two state lotteries—Illinois and New York—wanted to use out-of-state payment processors. That led to the 2011 reinterpretation of the federal Wire Act, which in turn opened the doors to online gaming.

“They got more than they asked for,” says Rose. “They got the right to everything but sports betting.

“The state lotteries have been the first to react to the liberalization of the gambling laws,” says Rose. “Illinois became the first to sell tickets using the lottery, and they were tremendously successful—so much so that the computer crashed.”

In January, the Illinois Lottery introduced yet another way to buy lottery tickets: through a smart-phone app. Not surprisingly, this innovation too was viewed by some as the next sign of the apocalypse.

“Gambling can really ruin people’s lives,” Anita Bedell, of Illinois Church Action on Alcohol and Addiction Problems, told the Chicago Tribune. “And now by having an app, it can ruin lives 24/7.” Convenience store owners cried foul, saying it would inhibit in-store sales.

Who’s On First?

Half a dozen state lotteries now offer some form of online ticket sales, says Rose. “And in some cases, they have statutes that permit them to have gambling online, where every other form, like casinos, would take an act of the legislature. So the lottery in many cases can be first.”

For political reasons, he adds, state lotteries in the U.S. “probably will not do what a provincial lottery in Canada did, and open up true video poker and video internet casinos. But in many cases, they certainly are going to be the first movers here. And then the casinos will have to play catch-up.”

Jonathan Griffin, policy analyst with the National Conference of State Legislatures, points to Delaware as an example of how the scenario likely will play out state by state.

“It really is who is already running it in the state. Nevada and New Jersey had a private-operator model, so when they transitioned to online gaming, they stayed with that model. In Delaware they use loose language in the statute to categorize all table games as lottery games, so the Delaware Lottery controls casino gaming and runs the casinos too.”

Rocky Road

No one would dispute it’s been a tough first year for legal iGaming in the United States. The three states that approved the games banked on millions in revenue that have yet to materialize.

And the road to that revenue is still full of speed bumps. A number of U.S. banks still decline to process online gaming payments. Some mobile devices reportedly cannot take the bets. In the early rollout of online gaming, geolocation technologies kicked some gamblers off the sites.

Reports have surfaced that players in New Jersey have been less than dazzled by their online experience, and in April, just six months after launch, online gaming in the Garden State saw its first decline. That takes care of Governor Chris Christie’s optimistic prediction that online games would reap $180 million for the state in the first year (in the most populous state with iGaming, projections have been drastically scaled back to about $12 million).

Nevada saw just $8.52 million in revenues during the first 10 months. Delaware’s results have been spotty so far, but the numbers are improving: Dover Downs, Delaware Park and Harrington Raceway generated just over $240,000 in April, up from $207,000 the previous month.

And while it’s hard to imagine that Congress would try to put the genie back in the bottle, Sheldon Adelson and Steve Wynn both back legislation that would restore the Wire Act and ban virtually all forms of online gambling.

The lure for all the states, casinos and state lotteries is the pot of gold at the end of the rainbow. Internationally, iGaming is a $35 billion business—that’s about half the value of the gaming industry in the U.S., which generated some $66.3 billion last year.

And Morgan Stanley predicts that by 2020, legal online gambling in the U.S. will generate $8 billion a year. That’s something for all the contenders to shoot for.

What’s Next?

Rose says the conversation about lotteries as providers of iGaming is just getting started.

“I went to G2E Asia in Macau and they had a whole day devoted to iGaming, but none of the panelists talked about the lottery. I brought it up, because the lotteries are clearly going to be some of the first to offer internet games for money to Americans. There hasn’t been that much recognition of how much the lotteries can do. That’s because the gambling industry is so fractured: the lotteries don’t talk to the casinos, and neither one talks to the racetracks.”

“There isn’t a model yet,” says Frank Fantini, of Fantini Gaming Research in Delaware. “First of all, you’re not allowed to gamble online in almost every state. The states online with lotteries—Maryland, Illinois, Minnesota—so far have limited themselves to lottery games. There is no case I can see where lotteries are getting into casino gambling, but lottery directors are continually looking to see what they can offer. They want the opportunity to expand.”

Fantini recounts a letter sent by state lottery agents to New York Senator Charles Schumer saying, in essence, “Hey, don’t go passing a federal law that outlaws online gaming.” “They want to make sure they’re not preempted,” Fantini says.

“I think it will grow like any other system,” says McIntyre. “The first casino in Nevada opened in the ’40s, and it took three decades before New Jersey opened up. It shouldn’t be a rush to adopt a platform and say let’s go right now. I’m not selling internet scratch tickets online anytime soon. So it’s not as if I’m protecting sales I’ll make next month.”

Strictly Business

Scott Gunn, senior vice president of Global Government Relations and U.S. Business Development at lottery and gaming giant GTECH, says it’s not a case of casinos versus lotteries, but of policymakers deciding which entity was first in line, and which will bring in the most revenues. In other words, it’s strictly business.

“The policymakers and regulators are deciding what the biggest economic impact is for them. But we also see a sensitivity to whatever the primary gaming voice is in the jurisdiction. So when you look out across the landscape at who’s doing iGaming and who’s contemplating it, it’s not surprising that in Nevada and New Jersey it was the commercial casinos.

“It’s not surprising in Ontario, where the Ontario Lottery and Gaming Corp. runs everything, that in addition to casinos and lottery they are now running iGaming. In Illinois it was the lottery. In Delaware it was that mix of the Delaware lottery as the technology backbone for the racinos that got the licenses. In California the tribal governments that lead gaming are trying to come to consensus as to the model.

“As we look at it,” says Gunn, “it’s really not who can do it better, casinos or lotteries.” Any tension between the industries “comes from companies doing what companies do, which is attempt to to protect their business interests within the sphere of the political legislative process.”

Two Can Play That Game

Casinos and state lotteries offer vastly different online products. But the technology is virtually the same.

Charlie McIntyre, head of the New Hampshire Lottery, says lottery games are an age-old American tradition, older by far than traditional casinos. Dartmouth College, he says, was founded by a lottery in 1769 “before there was even a country.”

That history may not give lotteries a head start on iGaming in the U.S. But it does speak to the durability and popularity of the games, now available in 44 states (Wyoming is the latest, and will launch its WyoLotto games this year).

Of the six states without lotteries, Utah, Mississippi and Alabama cite religious concerns. Alaska and Hawaii also have no lotteries. And last year, when a $636 million Powerball jackpot gripped the nation in lotto-mania, ABC News reported that Nevada, the nation’s gaming hub, has shut out every effort to introduce a state lottery. Even charitable drawings held by schools, Elks Clubs and Boy Scout raffles must be approved by the Gaming Control Board.

“It’s the gaming industry that doesn’t want to have a lottery,” said Gaming Control Board Chairman A.G. Burnett. “That’s pretty much the prevailing view even today.”

“The casinos don’t want competition from a state-run lottery,” economics professor and gaming expert Victor Matheson told CNN at the time. “Since they have so much power, they have successfully blocked a lottery.”

Lotteries that eventually want to offer iGaming might be fully equipped to do so, at least from a technological perspective. The architecture of all iGaming solutions is pretty much the same for online casino games and online lottery games, says Matteo Monteverdi, head of iGaming for GTECH.

“You typically have two components: the back office-slash-CRM platform, where the players register, provide their information, deposit funds, and withdraw funds” through an “electronic wallet.”

“The other component is the content. Casinos typically offer advanced or hard-core games like slots, roulette, blackjack and bingo. Lottery offers games like Powerball or Mega Millions and electronic scratch cards. From a technical perspective, there is no difference between the two segments.” Gaming providers outside the U.S. who offer all?lottery, casino games, sports betting, the works,?do so using the same system.

From the players’ point of view, the experience is markedly different. “There is a big distinction between synchronous and asynchronous games; synchronous games are a much more immersive player experience,” with the chance to win on the spot, says Monteverdi.  With asynchronous?draw games like Powerball or Mega Millions?you take your chance today with the chance of winning a day or two down the road. Today, more lotteries are offering “e-instant” electronic tickets; those are the ones raising the hackles of other iGaming purveyors, like bricks-and-mortar casino operators.

RTP, return to player or simply the payout, is also significantly different between online casino games and online lottery games.

“If you take a lottery, out of 100 percent of what they collect, approximately 65 percent is returned to the players,” says Monteverdi. “In the casino space, the RTP on certain games like slots is close to 95 percent.” The player experience on a 95 percent payout is much more immersive, interactive and enduring; an online casino game may take 15 minutes to play, whereas an online scratch card is over and done within seconds.

“The value proposition attracts two different demographics, so there is not an immediate overlap between the offerings,” says Monteverdi. “The two potentially could coexist with limited cannibalization, because they are talking to different segments and they provide a very different player experience.”

Not surprisingly, the lottery tends to attract an older demographic, and interactive casino games draw younger players. The social gaming segment, people who play on websites like Zynga or GSN, are “much more overlapped” with online casino games than lottery games, says Monteverdi.

Expanding the reach of the lottery arguably will help state governments in the U.S. top off their funding for health care, education and the environment (most states direct their lottery revenues to such benign efforts; the Pennsylvania Lottery, for example, explicitly funds care for senior citizens).

With many markets at saturation level, iGaming looks like the next frontier, including the lottery to some extent. But the resistance is likely to last for years.

“In the U.S. we have taken a little more conservative view towards gaming expansion and policy, and we  are also coming off a decade and a half of pretty serious casino expansion in the U.S., land-based, boats, tribal,” says Scott Gunn, head of government relations for GTECH.  “States are now looking at their entire gaming portfolio, and asking, am I fully exploiting that portfolio for the maximum benefit of my state?”