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.