States, including Colorado, are giving big companies more control over lotteries
By Tinashe Chingarande, Elizabeth Flood, Spencer Friedman and Daniel Lawall, Howard Center for Investigative Journalism
Companies that run state-backed lotteries already have a heavy hand in how the games are operated. But in the coming years, their control over lotteries is set to expand dramatically as state officials back down.
Analysts who follow the industry say that the biggest companies are trying to forge what are called “enhanced partnerships” with states, and what others call “privatization” programs that will shift most of the daily management and strategic decisions. from states to private companies.
The lottery industry in the United States is dominated by two giants, International Game Technology PLC and Scientific Games Holdings LP, and a handful of smaller companies, including Intralot SA and Pollard Banknote Ltd. These companies are expected to continue dominating this market, which boasted $82. billions of dollars in ticket sales in fiscal year 2020, as states are reluctant to risk hiring an upstart to run such a high-profile business.
Nationwide lottery systems are moving towards quasi-privatized operations, with state governments taking on a watchdog role while private companies rake in millions running this sophisticated form of gambling.
These companies provide the computer software and systems that run games such as Pick 4 in Kentucky and Maryland, Cash Pop in Florida, and Lotto in Colorado. Some of the companies also print instant scratch tickets, process winning tickets, and manufacture terminals – including video lottery terminals – used at points of sale.
They also power huge multi-state lotteries such as Mega Millions and the hugely popular Powerball, which made history in 2016 with a jackpot that reached $1.6 billion.
While these companies play a vital role in the 45 states that operate lotteries, plus Washington, D.C., the industry is changing, analysts say, in a way that will give them near-total control as private operators of state lotteries. ‘State.
“The ongoing transition will allow companies to efficiently deliver more services and manage almost everything end-to-end,” said Adam McLaren, vice president and principal analyst at Moody’s Investors Service in New York.
As lottery jackpots grow, involving multiple states, and lotteries introduce new products such as sports betting apps, the technology needed to drive these changes and upgrades becomes more complex.
McLaren said states lack the capital or expertise to manage these systems, monitor and secure user data and process winning tickets, while designing new games.
So far, only three states – Illinois, Indiana and New Jersey – have gone so far as to “privatize” their lottery operations. Illinois was the first to do so in 2011 when it hired Northstar Lottery Group LLC, a consortium owned by International Game Technology and Scientific Games. Indiana chose a company a year later that in 2014 bought International Game Technology and took its name. New Jersey reached an agreement in 2013 with Northstar.
In these transactions, the private manager typically takes over the sales, marketing, and management functions of the lottery in return for an upfront payment and a promise to generate a minimum net revenue for the state.
These arrangements are not always easy at first. Illinois canceled its contract with Northstar after a few years because revenue fell short of expectations. He then hired Camelot Group, a company in England that operates the UK National Lottery.
Under New Jersey’s 2013 deal with Northstar, the state received $120 million upfront and a commitment from the company to generate at least $1.42 billion in additional net revenue for the state over the duration of the contract. In a press release issued at the time, the state said the deal would generate more revenue than it might have expected had lottery operations remained unchanged.
“By combining the expertise and resources of the Lottery and Northstar NJ, we will be able to expand the Lottery’s presence in the marketplace, bring exciting new games to our customers and new services to our retailers. “said Carole Hedinger, who was executive director of the New Jersey Lottery at the time. But Northstar was unable to meet its targets and the deal was renegotiated in 2019.
In February, the Washington, DC lottery lost revenue and saw its image tarnished when its sports betting app was taken offline during the Super Bowl, one of the biggest days of the year for betting. sportsmen. The DC Lottery blamed a software glitch at Intralot SA, which signed a five-year contract in 2019 to run sports betting and other lottery services. In April, the DC Lottery said it received $500,000 in compensation from Intralot for the Super Bowl fiasco.
Is it really privatization?
There are limits to the amount of control states that can be transmitted. Federal law generally prohibits private companies from operating lotteries, fearing that their presence could lead to corruption.
In 2008, the Justice Department issued an advisory noting that states may hire private companies to operate certain aspects of lotteries, but the advisory also stated that federal law requires states to maintain control over “all important business decisions” and that private companies cannot receive more than a “de minimis” interest in the profits
The advisory means states, not private companies, must make important decisions, like participating in multi-state gaming, allowing online sales or building a sports betting app.
“What the phrase ‘de minimis share of profit/loss’ means is that the DOJ effectively signaled that what would be denied would be a long-term lease where you fully monetize the lottery for a long period of time,” a said Leonard Gilroy, Vice President. chairman of government reform at the Reason Foundation, a libertarian organization that believes most business functions of government should be privatized.
Gilroy said the DOJ’s decision means lotteries cannot be fully privatized. “It’s not going to happen. Federal law won’t allow it,” he said, adding that what most people call privatization plans are actually public-private partnerships.
Whether it is privatization plans or partnerships, analysts agree that others will be drawn up in the future.
In a recent report on Scientific Games, Zacks Investment Research Inc. in Chicago stated that the lottery industry’s transition to more private management has already begun and is “evident in the growing involvement of private providers in the management of the state lottery, higher prize payouts and the introduction of tiered prize management for national jackpot games.
David Gale, executive director of the North American Association of State and Provincial Lotteries, said there is a practical reason why lottery corporations will play a bigger role. He said they were needed to print the dizzying array of instant tickets, design and build new terminals and create the systems to take lotteries to the internet.
“States can’t do this alone, they’re not manufacturers,” Gale said. The association represents 53 lottery organizations.
A recession-proof industry
The lottery business is one of the few sectors of the gaming industry that seems recession proof.
At the start of the pandemic, for example, casinos were badly affected when they closed as COVID-19 spread and stay-at-home orders were put in place. But lottery operations haven’t been affected as much by the pandemic as gaming in general, and some businesses’ revenues have actually increased.
In the first year of the pandemic in 2020, Scientific Games reported total revenue of $2.7 billion, down 20% from the $3.4 billion reported in 2019, according to its report. annual 2020. But revenue from the company’s gaming operations fell 47% to $926 million during that time. Meanwhile, revenue from the lottery business increased slightly to $918 million in 2020 from $911 million in 2019.
IGT’s results were also supported by its lottery operations. IGT announced that its 2020 revenue from gaming operations fell 45% from a year earlier to $953 million, while revenue from the lottery business was down just 5.6%. % to $2.2 billion. Both segments rebounded in 2021. IGT declined to comment, but in its 2021 annual report the company said, “The global lottery industry has shown remarkable resilience during the COVID-19 pandemic.” .
Meanwhile, growing jackpots can lead to increased revenue. In 2016, when the Powerball jackpot hit $1.6 billion, IGT’s revenue hit $5 billion that year, a record high. The company has not confirmed the impact of the Powerball jackpot on its growth.
Consolidation and lack of competition
While lottery revenues are increasing, the number of businesses that provide lottery services has decreased. This is partly due to a series of mergers and acquisitions over the past few decades that have consolidated the sector and centered industry operations in Canada and Europe, although the United States is the largest market for most businesses.
The latest US-based lottery giant, Scientific Games, sold its lottery business in April to Toronto-based private equity firm Brookfield Business Partners LP for nearly $6 billion. The remaining portion of Scientific Games, primarily slots and online games or iGames, was renamed Light & Wonder Inc. and is based in Las Vegas. Brookfield retained the Scientific Games name and will operate the unit in suburban Atlanta.
This transaction leaves two Canadian companies, Brookfield and Pollard; two British companies, IGT and Camelot; and an industry-leading Greek company, Intralot.
“Years ago, there were three times as many lottery companies. Through attrition, takeovers and mergers, the number of companies has been reduced,” Gale said. “There are no new businesses.”
Lecturer Constance Mitchell Ford of the University of Maryland contributed to this report. The Howard Center at the University of Maryland is funded by a grant from the Scripps Howard Foundation in honor of newspaper pioneer Roy W. Howard.