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Lottoland

By Byron La Fleur

The concept of a disrupter has become pervasive in the modern day. Uber transformed the taxi industry by allowing anyone to become a driver; Air BnB shook up the hotel industry by allowing anyone to rent a property. The results had an immediate effect. Consumers had more efficient and cheaper options. What many fail to consider is that disruptors often ignore regulations, giving them an unfair advantage, which puts them at odds with the incumbents of the industry.

The lottery industry now has its own disruptor, Lottoland, which sells lotto bets on their digital platform.

They’re aggressively targeting lottery players with advertising campaigns. They’re also combative with lotteries. Elicia Bravo Garcia, Chief Strategy Officer at Lottoland, even showed an image of Darth Vader with the tag line “controlled by state monopolies” while referring to the lottery industry at Bits & Pretzels, a conference for founders of startups. “This might be a bit of an exaggeration, but they do their best at trying to scare off any type of competition and quash innovation,” she said.

Both sides have vilified each other, but which side is in the right? Is Lottoland another Uber, bending the rules to push gaming forward, or have they gone too far and endangered the players the lotteries protect?

Who Are They

Lottoland, based in Gibraltar, allows players to bet on lottos (lotto betting). Lottoland seemingly sells lotto tickets—Powerball, MegaMillions, EuroMillions, etc.—to consumers all around the world. Lottoland offers up 30 different games now. Their pitch to players is simple and effective: If your local lotto’s jackpot, say EuroMillions, is only worth £40 million, but the Powerball jackpot is worth $200 million, why shouldn’t you try to win the Powerball jackpot instead?

Lotto betting itself is not a new product, but Lottoland’s premise of a global product portfolio is gaining traction. In late 2016, they announced they had 4 million customers. As of today, Lottoland has announced they are nearing 6 million customers.

From a financial perspective, they were ranked as the 128th fastest growing company by The Financial Times after their revenue grew by 820% from 2012 to 2015. In 2016, their revenue totaled 300 euros million. The Gibraltar-based business is active in 12 markets, has over 300 employees, and has official gaming licenses in Gibraltar, the UK, the Republic of Ireland, and the Northern Territories in Australia.

Lotto Betting Explained

But what exactly is lotto betting? First, it is not lotto reselling. Lotto reselling is when a non-retailer agent gets involved in the transaction between players and retailers. The customer gives money to a lotto reseller, the reseller exchanges the money with a retailer for an official ticket, and then the lotto reseller gives the ticket to the customer. There are variations of lotto reselling, but there are three key points: 1.) It is an official lotto ticket, 2.) The lottery receives money in exchange for the ticket. 3.) If the player wins, then all or a portion of the official jackpot goes to that player. None of that is true for lotto betting.

Lotto betting is when players are making a bet on what number will be drawn in the real lotto draw. The lotteries are not involved at all. While it appears to a player in the U.K. that she is purchasing a Powerball ticket, she is purchasing a mirror version of the game. The jackpot is worth the same, the name is the same, but she is not purchasing a Powerball ticket. Instead, the player is making a bet with Lottoland, so 100% of her money therefore goes to Lottoland. And if a player wins the bet, she gets a payout that is not connected to the real Powerball jackpot.

Of course, that means Lottoland is responsible for paying out jackpots to winners. They cannot cover the jackpot through sales alone, like lotteries. Instead, Lottoland has developed complicated hedging measures to cover any potential large winners.

As of November 2016, Lottoland’s hedging system was broken down into five layers. For prizes less than £15 million, Lottoland is responsible for paying their customers any prizes they might win. If the prize falls between the second layer, £15 and £30 million, they have an arrangement with the insurance market Lloyd’s of London to help cover the prize. For prizes falling in the third layer, £30 million and £116 million, they use Insurance Linked Securities (ILS) to cover prizes. “The third layer, which is the heart of the operation, consists of ILS. ILS are very similar to catastrophe bonds, which are there to insure against catastrophic events,” Bravo Garcia, Chief Strategy Officer, Lottoland said at the NOAH 2016 Conference in London. “They’re not tied to any other asset class…. you can calculate your exact risk, your exact exposure…. and they are fully collateralized.”

The last layer is described as “Physical Hedge,” which suggests with very large jackpots, they purchase official lotto tickets from the games they are mirroring. “If and to the extent Lottoland’s hedging measures involved ‘the purchase of actual entries’ into a U.S. state lottery, this could present issues under the applicable state law,” Mark Hichar, Partner, Hinckley Allen said.

Lottoland’s rapid success is pushing the company to grow rapidly. They are looking to expand further into Latin America, such as Mexico and Columbia, Africa and Asia, with a particular focus on China. Their lotto betting product cannot be sold in America due to current regulation. “The U.S. is not so simple,” Nigel Birrell, CEO, Lottoland, said at NOAH. “Lots of restrictions there but certainly opportunities in the reseller market and cross selling casino. We can do that in the bigger states such as California, New Jersey and New York.”

Lottoland also wants to take part in state privatization. In March 2017, Lottoland filed an application to have its own lottery in several German federal states. “We understand what lottery players worldwide are looking for. Now we want to extend our offering even further and set up our own lottery in Germany,” said Dr. Rolf Stypmann, spokesman for Lottoland and former Managing Director of Toto-Lotto Niedersachsen GmbH in Germany.

The German State Lottery Association produces £7.3 billion in revenue each year. About 40% of the money goes directly to the finance ministers of each federal state. “These figures demonstrate why the federal states have an interest in maintaining the public lottery monopoly and refuse any kind of progress. For them, too much money is at stake, especially in comparison to sport bets,” Stypmann said.

Misleading Advertising

For many, the question of whether this is legal is the first that comes to mind. The answers vary widely depneding on who you ask. “We respect and comply with the law and don’t anticipate that our lawful, licensed betting products should upset anyone who might consider us as competition,” Bravo Garcia said.

On the other side: “Lottoland has already faced multiple actions by national authorities against its illegal behavior on the gambling market. For instance, in the Czech Republic Lottoland offered its products without the required license, which led to criminal prosecution and blocking of the domain name ‘lottoland.cz.’ It continued its illegal activities e.g. by registering and using the domain name ‘sportka.org,’ which it had to transfer to the legitimate rights holder, the Czech lottery operator SAZKA. Lottoland’s website is blocked for French players by the French regulator and also the Spanish regulator took action against Lottoland in order to ensure that Spanish players cannot access the website,” Andrew Pilkington, General Secretary at Services aux Loteries en Europe (SLE), said.

Both sides have gotten into bitter PR fights with each other, and Lottoland has conducted very aggressive advertising campaigns. A glance at Lottoland’s Ireland website reveals just how aggressive. The most prominent image is a Trump impersonator holding two circular logos, one branded with U.S. Mega Millions and the other with U.S. Powerball, around his nether regions with the tag line, “Grab him by the balls.” There are also videos, each depicting Trump acting in an imbecilic fashion attacking Lottoland for selling Powerball and Mega Millions. “They’re playing our Powerball, which is also what I call my left fun bag (believe me),” the Trump impersonator states “… and I am banning Lottoland with immediate effect!”

Now whether the Lottoland ad is humorous or insulting depends on the viewer’s politics. But the ad campaign does raise questions about the use of trademarks and how clear Lottoland is being about their relationship to the product they are selling. The Trump impersonator suggests that Lottoland’s customers are “playing our Powerball” and in another video, a woman holds a sign saying “Give Us Powerballs (not a typo) and MegaMillions NOW!”

As already stated, Lottoland does not sell Powerball; they sell bets on Powerball. They are not a lottery; they are a gambling operator. The distinction is important.

“Lottoland has faced a court order in Australia following legal action by the licensed lottery operator (Tatts) regarding how it markets its product. The U.K. authorities have also reprimanded Lottoland on similar issues—the U.K. Advertising Standards Authority has found that Lottoland illegally misleads consumers in its advertising,” Pilkington said.

The misleading ad Pilkington references is a radio ad issued in September of 2016. The individual who filed the complaint said that Lottoland implied the product was a lottery. Lottoland responded that they used the word “bet” in the advertisement which should be enough to convey that Lottoland was a gambling operator, not a lottery. The U.K. Advertising Standards Authority ruled that Lottoland breached rules related to misleading advertising.

Why Should U.S. Lotteries Be Concerned? 

by Mark Hichar, Partner, Hinckley Allen

First, Lottoland exists to make a profit for their investor/owners. Lottoland’s primary duty is to them, not to its players. U.S. lottery players may not understand that Lottoland: (1) is not selling actual U.S. lottery products, (2) is independent of and unrelated to U.S. lotteries, and (3) is outside the control of U.S. lotteries. As a result, actions of Lottoland could be misunderstood by players and the public to be actions of or on behalf of U.S. state lotteries. Evidence of such confusion surrounding Lottoland exists.

Second, Lottoland’s assurances that prizes will be paid are based on the facts that it has been licensed and is subject to regulation, and employs professional risk managers. However, should Lottoland’s insurance model fail and render Lottoland unable to pay a prize, the resulting scandal would likely cast a negative light on U.S. lotteries, because again, players and the public might not understand the distinction between Lottoland and the U.S. state lotteries. Worse, this could reduce the trust players and the public have in U.S. state lotteries, causing play of the actual state lottery games to decrease.

Third, to the extent Lottoland winners are outside the U.S. (and I expect all would be), and to the extent their winnings are publicized, this could create the impression that out-of-state (indeed, out of the country) players are benefitting from U.S. state lotteries. Again, the distinction between U.S. state lotteries and Lottoland would likely not be well understood by U.S. residents. Having local winners increases the excitement of lottery play. If U.S. lottery players were under the impression that they were competing with players from abroad, their enthusiasm for their own state lottery could be diminished, and lottery play could therefore decrease.

In short, U.S. state lotteries should be concerned, because the trust of their players—trust which they have worked tirelessly to build and maintain over many years—could be harmed due to the actions of an entity (Lottoland) over which they have no control.

Protection

The matter gets more complicated depending on laws for each jurisdiction. For instance, in the U.K., the Gambling Act 2005 prohibits the offering of bets on any lottery which “forms part of the National Lottery.” The National Lottery sells EuroMillions, so why is Lottoland allowed to sell their variation? It is due to a legal loophole.

EuroMillions is run as a partnership between the different lotteries. While the jackpot and numbers are shared, each jurisdiction’s version of the game is different. Therefore, Lottoland does not sell the U.K. version of the game, but rather another jurisdiction’s version, and therefore can skirt the law.

The U.K. government is trying to close that loophole because it is worried that players will not be able to recognize the difference between the game and betting on the game. “In support of this, they cited research—from Camelot—in relation to a EuroMillions betting product which showed that only 14% of respondents understood that it was a betting product, whilst 61% thought it was a way of participating in the EuroMillions Lottery,” Alasdair Lamb, Associate London, said on the legal commentary website CMS Law Now (Editor’s Note: He has recently reposted the article on Linkedin).

They are also worried that competition like Lottoland will entice players away from the National Lottery’s products. Lottoland has already started offering EuroMillions for less (£2) than the amount sold by the National Lottery (£2.50).

However, Lottoland has submitted evidence that U.K. EuroMillions tickets sales have been unaffected since the lottery betting company entered the U.K. market. “In fact, the evidence and analysis we’ve submitted proves we do not take customers away from Camelot. In truth, it is their own decisions that are having a significant and often negative impact,” Birrell said in a press release.

“Through numerous customer surveys we’ve found that often people who bet on Lottoland will remain buying lottery tickets from their national lotteries. That’s because when coming to Lottoland customers are looking for something very different to the usual lottery experience. For this reason and as further explained we do not see ourselves in direct competition with existing lottery providers—we are attracting a new customer group,” Bravo Garcia said.

Lottoland is currently asking the U.K. government to spend a minimum of two years reviewing the case before making any final decisions on updates to legislation.

Trademarks

Lottoland’s use of game names—such as EuroMillions, EuroJackpot, Powerball and MegaMillions—also raises questions. Lottoland’s logos for these games are derivatives of the original ones, but they look alike enough that consumers are easily able to understand the reference. The name is usually the same or a slight variation, like U.S. Powerball.

“These websites impede upon the rights of MUSL and its member lotteries by misusing nationally- and internationally-known trademarks, and by offering erroneous information about lotteries in general. These efforts diminish the Powerball mark and cause confusion among the playing public,” Wayne Dolezal, Deputy Executive Director, Multi-State Lottery Association (MUSL), said. “Further, they take monies from the public that would otherwise be spent on Powerball or other games of legitimate lotteries, both in the U.S. and outside the U.S., which deprives those lotteries of sales and a result, reduces funding for the public good.”

Whether Lottoland may have infringed on these trademarks depends on the trademark in question. While Powerball and Mega Millions are registered trademarks in the U.S., they are not in the European Union. With trademarked games that are registered with the EU Intellectual Property Office, like EuroMillions, Lottoland has tried to register their own variations.

The EuroMillions brand has been protected. “SLE successfully challenged Lottoland’s attempt to register its own EuroMillions logo as a European trademark. The Board of Appeal of the EU Intellectual Property Office found that the EuroMillions word element of Lottoland’s logo was the most decisive element—which would likely lead to confusion on the part of the average consumer—and thus refused the registration of Lottoland’s trademark application,” Pilkington said.

On the other hand, Lottoland has successfully registered their version of EuroJackpot.

In terms of American trademarks, Lottoland doesn’t own either, although Lottoland did attempt to register a Mega Millions trademark in 2013 but its status is currently: Registration Cancelation Pending. The problem is that no one else owns them either in European Union. MUSL has attempted to register Powerball in 2007 and 2016 with the European Union Intellectual Property Office (EUIPO). The trademark application was opposed, however, presumably because Powerball is not available for sale in the European Union. While Lottoland doesn’t own Powerball, they might not be barred from using it either. However, MUSL will not stop its efforts to protect the brand.

“MUSL has taken the necessary legal steps to protect our brand and intellectual property here in the states, but the international situation is very different…the legal footing is much more slippery in the international space,” Texas Lottery Executive Director Gary Grief said.

“MUSL is committed to protecting the Powerball mark for the benefit of our Member and Licensee Lotteries, for lotteries everywhere, and to protect the playing public,” Dolezal added.

Escalated Tactics

Lottoland has had trademark difficulties in Australia too. After Tatts Group sent a letter to Lottoland questioning its legal and intellectual property rights, Lottoland released a response in December 2016. First and foremost, the corrective notice clarified that it is not a lottery operator, but a gambling operator (bookmaker) and that players are not purchasing official lottery tickets. They also had to respond to their use of QuickPick, which is a trademark product of the Tatts Group. “Lottoland has removed references to that trademark from its website,” the notice reads.

However, the fight between Tattersalls and Lottoland is hardly over. “The incumbents are not big fans of us and we understand that,” Lottoland’s Australian Chief Executive Luke Brill said in the Sydney Morning Herald. “But my view is the global lottery market is crying out for innovation. Half the population play the lotteries and in that sense it is much bigger than sports betting—but it’s been a sleeping giant in lots of jurisdictions including Australia.”

The fight between Tattersalls and Lottoland has now shifted from a trademarks war to a financial war with significant ramifications. Lottoland acquired a 7% stake in Jumbo Interactive in late April 2017. Jumbo Interactive is an online lotteries operator who signed a deal with Australia’s Tatts Lotteries Northern Territories to provide a range of lottery games for the Ozlotteries.com website. Jumbo Interactive has around 400,000 active customers.

Jumbo Interactive resells tickets, which as previously stated, means the money makes it back to the official lotteries. A hypothetical question then arises: If Lottoland did acquire Jumbo, would they try to convert players from purchasing official lotto tickets (reselling) to lotto betting?
That would be a significant chunk of players for the lotteries to lose. Speculation aside, Tatts Group responded quickly to Lottoland. On May 12, Jumbo issued 6.6 million shares (15%) and another 3.5 million share options subject to shareholder approval to Tatts. In return, Jumbo renewed all reseller agreements with Tatts Group for an additional five years.

Future?

The feud between industry incumbents and Lottoland shows no signs of abating. Both see themselves in the right.

Lottoland has often referred to the lotteries as selling “antiquated” products, while seeing themselves as champions of innovation and the people. “Lottoland brings choice, value and innovation to the betting market via a range of new and differentiated products and prize schemes. We offer our customers bets on 30 different lotteries, most of which they do not have direct access to,” Bravo Garcia said.

Australian Senator Nick Xenophon sums up the gaming industries’ impression of Lottoland. “Lottoland has turned [lottery] into a legal no man’s land and we need to close the loophole,” Xenophon told news.com.au. “It’s also causing a hemorrhaging of local territories including state-owned ones. We will miss out on money for hospitals and schools because it will bleed government revenue.”

Yet Lottoland does not see themselves as a threat for lotteries. “Our lotto betting products are distinctly different to what the lotteries out there offer—Lottoland has lower brand recognition than most traditional lottery products, no retail presence (unique online player journey) and a wide range of products,” Bravo Garcia continued. “The products offered by Lottoland are materially different in ‘look and feel.’ Moreover, many of our unique features are contrary to the traditional lottery mechanics and logic making us even more different.”

The validity of that statement remains to be seen. Hichar points out that Lottoland’s “About Us” web page contradicts that statement: “Lottoland tells players: ‘For all intents and purposes you will have the same experience as if you had played the official draw.’”

But despite all of the bad blood, Lottoland says they want to work with lotteries: “We are keen to work together with lottery operators allowing them to utilize our versatile platform (which is our propriety technology) and to benefit from our learnings and expertise in the online space. In fact, through a simple API integration to our platform we believe we would be able to bring any land-based lottery online,” Bravo Garcia stated.

Considering the extensive history already developed between Lottoland and prominent lotteries, operators and their trade associations, it may take some time before the two sides would be willing to work together.

2017-06-07T19:56:44-05:00

2 Comments

  1. Stephen Wade June 8, 2017 at 4:02 pm - Reply

    Thanks to Byron and to Mark Hichar for this very informative article!

  2. Michael Jones June 17, 2017 at 1:10 pm - Reply

    Fascinating and very well written.

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