Intl_Gaming

The Privatization Gamble
Can Private Sector Provide a Cure for Ailing U.S. Lotteries?

The California State Lottery recently rolled out a point-of-sale device called a “check-a-ticket” machine. A player slips a lottery ticket in the machine’s bar-code reader and a scrolling LED message pronounces the ticket a winner or loser. Most of the time, the display tells the player, “Sorry,” but you are not a winner.

“We call it our sorry machine,” a clerk at a Los Angeles grocery store explained as a scratch-off ticket player got the bad news from the check-a-ticket machine. More than four decades after New Hampshire became the first U.S. state to sponsor a lottery, “sorry” is a pretty accurate description of the current condition of lotteries. From California to New Jersey, lotteries are underperforming. Sales are stagnant, and profits as a percentage of sales are down. The problem is an aging product and customer base, feeble and ineffective marketing strategies and increased competition from Indian casinos and Internet gambling.

In the midst of this slump, states are looking for ways to patch gaping budget holes without raising taxes. For some, lottery privatization looks like fast and easy money.

“The problem for lotteries is that their core customer base is aging out, and it’s not being replenished,” said David Morrison, president of TWENTYSOMETING Inc., a research and consulting firm specializing in the young-adult market. “Privatization has the potential — underline the word ‘potential’ — to make lottery gaming work harder to reach the next generation of customer out there.”

Considering the size of the state, California’s lottery numbers are nothing to brag about. With $3.6 billion in total sales in 2006, the lottery ranked fifth among 42 state lotteries and 30th in per capita sales at $98.

While no state has yet taken the privatization plunge, the topic remains hotly debated in state legislatures and governors’ offices. Most states are looking at one of three privatization templates: an outright sale for a period of time, outright sale for a period of time with revenue-sharing, or maintaining ownership but handing over management to a private concern in exchange for a percentage of sales in the style of the United Kingdom’s National Lottery.

The issue emerged several years ago when cash-strapped local and state governments started leasing public infrastructure like toll roads. If privatizing a toll road or an airport makes sense, then selling off a state lottery makes even more sense, according to some. Unlike a toll road, a lottery is a strictly retail business with sales based entirely on generating demand. States aren’t set up to be in the business of retail sales.

With interest rates low and market conditions favorable, Wall Street is dangling huge sums of cash in front of states in an effort to move in on state lottery action, which they see as offering predictable, stable returns and plenty of growth opportunity. Lehman Brothers put a price tag on the California Lottery of $37 billion for a 40-year lease, assuming a boost in ticket sales, and tossed out several ideas for doing precisely that, among them using lottery terminals to sell tickets and services, coupling ticket machines with ATMs and placing advertisements on the backs of ticket.

Ernie Passailaigue, president of the North American Association of State and Provincial Lotteries, a non-profit association representing 51 lottery organizations, said states considering privatization to boost sales should first “look inward” and figure out whether it’s necessary at all to involve the private sector. One of the first things a private owner would do is try to loosen or lift some of the rules that are keeping revenues down. But if the private sector will inevitably try to change the rules then some states might be better off holding on to their lotteries and changing the rules themselves, Passailaigue said. Restrictions on advertising, player age limits, placement of terminals and the introduction of new types of games are some of the topics that lotteries directors could be looking at.

But when it comes to tapping into the younger market, there is only so much that lotteries can do because they are hamstrung by state and federal law, Morrison said.

“The best ways to reach that young marketplace are not allowed by law. Younger people want to play the lottery on their cell phone and the Internet, but right now that is illegal. Think about how many more tickets you could sell if you allowed them to game on their cell phones. It’s a phenomenal prospect.”

There is also the fact that lottery marketing at its core is inherently problematic. Too little and sales suffer. Too much and a state is seen as encouraging potentially destructive and addictive behavior, especially on the part of those who can least afford to play.