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By Byron La Fleur

In a globalized economy, the lottery’s legislatively-protected monopoly is unique. The benefits of this shield protects lotteries from competitive peers, but it also bears a great cost. “New” technology (even if it is starting to become old technology in other sectors) is difficult to adopt in the lottery world due to endless layers of bureaucracy. The best example is the internet. Legislators in most states are wary of letting lotteries sell online despite it being an essential channel. This gap in what lottery players expect and what lotteries can offer has given tech companies the opportunity to find its way into the repressed industry. The result could dynamically shift the landscape of online lottery forever.

Entrepreneurs’ answer to the gap between lottery capabilities and consumer expectations is simple. While the lottery cannot sell tickets directly to players online, companies could purchase tickets on behalf of players. They then convey the numbers to the player through the internet and hand the ticket over if the player won. There is enough legal leeway depending on state laws that allows them room to operate. This operation is dubbed a courier service.

“I consider them to be operating in an area of less legislative clarity. In most if not all lottery states, the state lottery has the power… to determine the method to be used in selling lottery tickets…. These are broad powers, and in many states courier services may reasonably be determined to be within the scope of these powers. So I see it as a matter left to the discretion of the lottery commission and/or lottery director, subject, always, to any applicable constitutional provisions, and to the political environment in which the lottery operates,” said Mark Hichar, Partner, Hinckley Allen.

When considered in this light, the courier services aren’t anything new. Players often ask others to purchase tickets for them. During large jackpots, players often have one person go out to purchase tickets for both individuals and groups. “I think they just monetized the office pool mentality,” New Hampshire Lottery Executive Director and NASPL President Charles Mcintyre said.

Domestic vs. International

Currently, there are two courier service models: domestic and international. The domestic courier services should be looked at as a natural extension of the lottery. The courier sells tickets within state boundaries. The games sold by the courier are the games of the state in which the player resides. This model has growing acceptance in the United States, with New Jersey Lottery being the first to have regulations for this new business model.

On the other hand, the international model is highly contentious for many reasons. This model sells U.S. games like Powerball and Mega Millions outside of the United States. It is important to mention it for clarification. This article will focus only on the domestic couriers. All references regarding courier services apply to the domestic services only.

Benefits and Issues

Despite New Jersey being the only state to have formal laws regulating this service, domestic couriers are operating in multiple states across the country. “In New Hampshire, it came out as a review of our laws and that there is nothing that prevents it. New Hampshire is a very pro-business state. There is nothing we can do to prevent it, and we don’t stand in the way of it too vehemently,” McIntyre said.

With these services already operating, it is essential to understand the benefits and issues that could arise in the future. One concern is the threat of potential brand erosion, particularly regarding the protection of consumer data and funds. If any loss of data or money occurred, this could hurt the lottery in the public eye due to a reduction of trust for both the courier and the lottery. “As is the case with any online transaction, personal and financial information (data that is not captured in traditional lottery ticket sale) must be protected, and it is imperative that transactions conducted using any third-party services are held to the highest level of integrity and security standards,” DC Lottery Executive Director Beth Bresnahan stated.

The potential issue could be melded into a benefit. Data leaks due to hacking are more prevalent than ever. Offloading that responsibility to a third party service could be a bonus.

“The fact that we don’t know precisely who buys most of our stuff is more and more distinctive of the lottery industry. The private sector regards customer data as a big asset that can be used to personalize service and build loyalty. When data is stolen, it becomes clear that having custody of personal information is also a liability. Governments are very sensitive to liability, and may direct lotteries to keep only the data absolutely required for reporting,” Dr. Stephen Wade, Principal, Lottery Management Consulting, LLC said. “In this situation, it would serve a lottery well to let someone else acquire and work the data to get the insights, and leave the sensitive personal information management to someone else.”

The biggest immediate benefit of the service is clear. For lotteries that do not have an internet solution for any myriad of reasons, they now have a turnkey solution. After all, lottery games are impulse purchases, and the internet will help capture more sales, especially during big jackpot rollups. The added element to reach an entirely new demographic is also a big incentive. Lotteries know there are nonplayers/infrequent players who simply don’t play because it isn’t easy enough.

“We live in an age of extreme convenience in which with a few simple clicks just about anything can be purchased and delivered to our doorsteps. As such, selling online presents tremendous growth opportunity for most U.S. lotteries. For those jurisdictions that cannot directly offer online lottery sales, courier services can provide a means to potentially reach new players and capture new revenue,” Bresnahan said.

However, other directors were not convinced that the courier services would ultimately drive sales significantly. One suggested that the lottery and retailers are already marketing to the same people that the courier services would be.

Finally, one of the most interesting benefits could be in the way it helps lotteries acclimate the public to being able to purchase tickets online. “Probably the most significant aspect of the emergence of courier services will be their ability to make legislators comfortable with the notion of internet lottery sales. There isn’t anything the courier services offer that couldn’t be done better and cheaper by the lotteries themselves, but lawmakers balk at lotteries selling over the internet. Courier services may be a ‘transitional’ business model to get political acceptance of the concept of iLottery sales. Eventually, they would fade away as lotteries incorporate mobile/internet sales into their own business models as simply another distribution channel for their products,” Gordon Medenica, Director, Maryland Lottery and Gaming Control Agency said.

The Domestic Couriers

The most well-known domestic courier services are Lottery.com, formerly AutoLotto, and Jackpocket. Lottoland USA and other companies could also become a domestic courier, although they are better known currently for other business operations. For this article, all quotes pertain only to their domestic courier offers.

Jackpocket CEO Peter Sullivan explained there are more benefits than the ones described in the previous section. For instance, Jackpocket would be able to push players to scratch tickets by helping them find stores. It would also greatly reduce unclaimed prizes as players wouldn’t be responsible for holding onto their tickets and potentially losing them.

But couriers can also solve regulatory issues by ensuring players cannot avoid taxes or child support by transferring their tickets. Last autumn, there was a series of articles on players, who won far more than was statistically possible, that was published. One of the suggestions was that these players were receiving winning tickets from other sources. But a courier service would eliminate this threat. As the courier has detailed information on each one of their clients, the lottery would ultimately be able to know that the person who bought the ticket was the person who was awarded the prize.

Finally, the courier services would expand sales at no incremental cost. Jackpocket’s website states that the average Jackpocket user is male, 36-years-old, married, with a college degree and an income over $65,000. This would be a very new audience for draw games, which generally have a much older core audience.

All these factors combined reveal a lucrative opportunity. “The opportunity there is to have a 3.5x increase in draw game revenue. This is a combination of attracting new players as we make the lottery accessible and attractive to millennials as well as enabling time-pressed professionals to purchase lottery tickets with higher frequency,” Sullivan said.

Tom Metzger, CEO of Lottoland USA, is also closely monitoring courier services as a potential opportunity to help New Jersey grow lottery revenue. He expressed similar sentiments. “U.S. lotteries are in a unique position to capitalize on the convergence of all types of gaming. Many lotteries already monitor VLTs in addition to their traditional draw and instant games… It is in all of our best interests to find ways to reach new customers, grow revenue now, and stay ahead of the curve.”

The other important benefit is that the overall gambling industry has very high customer acquisition costs (CAC). Michigan Lottery’s press release with Income Access gives a CAC example: a $200 purchase would reward a player with a $100 bonus. Off-loading the CAC expense, as well as any retention cost, could be a large cost savings.

“A key benefit of courier services that I haven’t heard widely discussed is that the courier will be responsible for new customer acquisition, marketing, and service. Most state lotteries only have 1-2% of sales allocated to their advertising budget. Effectively acquiring and keeping customers online is an expensive proposition that is not only high reward, but if not done correctly can also be high cost,” said Metzger.

A glimpse into how much information courier services have on their customers’ playing patterns. Here Jackpocket shows that bets are heavily concentrated in midtown and lower Manhattan. Notice that areas with high rates of poverty, such as the South Bronx, have the lowest concentration of bets. (Image courtesy of Jackpocket)

New Jersey Spotlight

New Jersey is currently the only state to have officially passed a law allowing courier services as detailed in this article. In 2017, New Jersey Gov. Chris Christie signed Assembly Bill 3094 into law, which legalized courier services. This is the first and only U.S. law that specifically allows the service. New Jersey Assemblyman John Burzichelli initiated the bill in the House with support from Senator James Whelan in the Senate.

It is supposed that the bill’s origination was due to lobbying by companies like Jackpocket. But AB3094 was in fact the second version of the bill. The first was AB4018, which was introduced in 2014. At that time, Jackpocket was still seeking seed funding and Lottery.com had not officially formed.

AB4018 passed both the state House and Senate but hit a dead end when it received an absolute veto in 2015 from Gov. Christie. The reason for the bill was to help those who cannot purchase tickets themselves due to a disability, as well as to make it easier to buy tickets, rather than a private lobbying effort.

“Ticket delivery will make lottery products more accessible for players who are homebound or find it inconvenient to get to a retailer,” said Burzichelli in a statement in 2015. “This bill is aimed at saving players’ time and broadening a customer base that provides revenue for services that benefit all New Jersey residents.”

So what does this bill actually mean for the New Jersey Lottery? With the public comment period now over, New Jersey is still in the final stages of reviewing the regulations. But there is information that can be gleaned.

There are four general sections of the regulations, but before elaborating on those, there are three specific provisions that should be covered. The most critical is that couriers cannot be a lottery retailer and therefore must work with a separate licensed retailer. This helps keep the existing retailer network content; it appears to be working. “The Lottery is unaware of any ’push back’ and received limited public comment from brick and mortar retailer organizations, in response to the courier regulations,” New Jersey Acting Executive Director John White said.

The second distinction is that the courier can charge a separate transactional fee. In other states, couriers split the retailer commission to pay for their overhead. New Jersey Lottery paid $181.9 million in commission fees in fiscal 2017 with a commission rate of 5%. Adding even a few cents more onto each ticket purchase would result in millions of dollars. (This could reveal a lot about players’ elasticity of demand—for instance to see how willing players would be to pay credit card processing fees.)

The third element is liability. Any mistake is wholly the courier’s fault, and the lottery is not liable. The courier service will also be subject to audits.

The four general sections of the New Jersey regulations can be divided into four categories: consumer protection, ticket processing, regulatory concerns and responsible gaming.

The New Jersey Lottery regulations would require certain consumer protection measures, like how the courier holds and protects customer receipts, as well as making sure their customers’ funds are segregated and insured. Some of the provisions are quite substantial. For instance, in its current form, courier services must post a bond of $40 million for the protection of its courier customers.

The regulatory concerns deal with measures like: geolocation to make sure all purchases occur within the state of New Jersey and age verification measures. The regulations also give the New Jersey Lottery director a lot of control over the services. Any misstep by the courier can result in a fine and the director can pull their license if need be. “The Director of the New Jersey Lottery has always been afforded great discretion by the regulations and this was carried into the courier regulations as the Director will be the most familiar and involved leader in regards to the couriers. The Lottery has an obligation to maintain the integrity of its brand and the Director has the clearest insight into how actions by a third party may affect the brand,” White stated.

The regulations also mandate responsible gaming measures, including spending limits. “The Council on Compulsive Gaming of New Jersey had worked extensively with the DGE when their regulations were written and having parallel requirements provided assurance that the lottery’s commitment to responsible gaming would be met. By providing concrete language and requirements for responsible gaming, each courier will have a clear understanding of the importance of responsible gaming to the New Jersey Lottery,” White said.

Two additional interesting points are player information and marketing techniques. The courier service will need to give the lottery specific information on players, including the full name, the email, and the location of the purchase. They will also be able to offer promotions and discounts at their own expense, although the director can order them to cease a promotion if necessary.

“I think the New Jersey regulations provide an excellent road map for other state lotteries to use as guidance if applicable law does not permit them to sell electronic (intangible) tickets online in the manner that some lotteries can, and they wish to accommodate online sales using the concierge services model. New Jersey’s regulations provide thoughtful and reasonable guidance on critical aspects of courier services,” Hichar said.

“We believe all eyes are on New Jersey for the courier services across the country, as we are the first in the industry to have to regulate this new type of sales, which led to great efforts being made during the rule-writing process in hopes that the industry will adopt similar comprehensive regulations for the protection not only of their state lottery, but of the couriers, retailers, and customers within their states,” White said.

Conclusion

Couriers might be new for the U.S. market but there are examples of ticket resellers in the global lottery industry. In 1999, the German lottery reseller Tipp24 opened shop with the trailblazing premise of using the internet to resell German lottery tickets for a convenience fee.

The company used this model until 2009 when it had to dramatically change course. The German government prohibited selling any gambling ticket over the internet or marketing. This forced Tipp24 out of Germany and into the U.K. where they changed business operations from reselling tickets to lotto betting. Since they had spent 10 years creating a relationship with 2.4 million German customers, it was easy for them to transition to a derivative version of German lottery games and continue selling to the same customers. The only difference was instead of earning 10% of sales from commissions and convenience fees, they now received a higher profit margin as a synthetic lottery. Within nine months, Tipp24 retracted its earlier profit warning to shareholders and increased its earnings forecast. Tipp24’s relationship with the German lotteries and lottery associations, like World Lottery Association, were strained.

Another example is Jumbo Interactive which reached out to the lottery operator Tatts in the early 2000s about selling its tickets online. But without an API to the central system, Jumbo used terminals to manually input the bets into the central system. While the situation loosely resembles the courier services offered in the U.S., it is a good example of how the relationship can grow. Jumbo then developed the API to the central system and is now an essential partner to the Australian lotteries. Last year, Jumbo expanded its commercial relationship with Tatts with a long-term extension and expansion of its existing lottery reseller agreement.

“Unfortunately, the issue with the courier type of operation is it is not scalable,” Brian Roberts, President, North America, Jumbo Interactive said. “One of the issues is that you need the physical ticket and that adds a lot of cost to the operation.”

This may be the unavoidable long-term problem with the current model. While printing tickets allows the courier to take advantage of unclear provisions in some states’ laws, it is expensive. Long term, courier services want to integrate into lotteries’ central systems.

Ultimately, they could also be responsible for lotteries selling online. To requote Medenica—“Probably the most significant aspect of the emergence of courier services will be their ability to make legislators comfortable with the notion of internet lottery sales. There isn’t anything the courier services offer that couldn’t be done better and cheaper by the lotteries themselves, but for some reasons, lawmakers still have a bugaboo about lotteries selling over the internet. Courier services may be a ‘transitional’ business model to get political acceptance of the concept of iLottery sales.”

For now, courier services provide an immediate solution to the absence of an online lottery presence. “The technology is here and will quickly overwhelm us if we don’t embrace it and leverage it in the right direction. Private industry is much better positioned to influence policymakers than state lotteries, only making our job that much tougher to harness this enormous market potential to our advantage,” Texas Lottery Executive Director Gary Grief explained.

“Of course, internet and digital marketing has become a highly developed field, and the lottery vendor community already has the expertise to exploit these opportunities when lotteries are simply granted permission to proceed. None of this is rocket science anymore; it’s just waiting for our policymakers to get their heads out of the 20th-century sand,” Medenica said.

When most lotteries can sell online, Jackpocket and other courier services could still be a vital asset to the lottery. “[Couriers and lotteries will be similar] to how retail outlets’ websites complement a manufacturer selling direct-to-consumer. They coexist because what they offer is an expanded footprint as well as consumer choice so this benefits both lottery players and the lottery,” Sullivan said.

McIntyre had a similar sentiment: “The more places you’re in, the more product you’re going to sell, especially considering that they basically do jackpot games which are mostly impulse driven.”

All in all, the lottery industry is in a wait and see period. As courier services enter new states either with a license or tacit approval from the powers at be, the rest of the industry will watch with bated breath to see what happens. On one hand, after a few years, the money won’t be there and the couriers will “fade away.” On the other hand, couriers could be the driving force behind lotteries directly selling online and become an essential reseller partner.

For now, one thing is clear. New Jersey will soon provide the industry with the first official road map to enfold the couriers into the industry.

“As daunting of a task as it was and many hours, I think we’re really excited to be on the cutting edge of this and we are really proud of the regulations that we put forward. The response so far from others in the industry and the comments that we received, I feel like all the effort that went into it was well worth it,” Megan Mazzoni, Deputy Director of Administration, New Jersey Lottery said. “We’re excited to see where it goes. It could very well change New Jersey and beyond for lotteries across the country.”