As the complex business of sports betting continues to expand in the U.S., what strategies can lotteries use to evaluate the potential, the risks, and the opportunities?
One year after the PASPA repeal kick-started the process of expanding legal sports betting in the U.S., lotteries are focused on determining what role they can or should play. Observes Charles Cohen, IGT PlayDigital Vice President, Sports Betting, “The creation of the sports betting industry today is on a par with the creation of the lottery industry itself.” The wide field of possibilities requires lotteries to make individual decisions about how and whether to extend their brand to capture the potential for growth and new players. La Fleur’s discussed the state of play with Cohen and Scott Gunn, IGT Senior Vice President of Corporate Public Affairs.
La Fleur’s: The Rhode Island Lottery partnered with IGT and William Hill to become the first U.S. lottery post-PASPA to open a sportsbook, powered by the IGT PlayDigital end-to-end sports betting solution. With IGT’s QuickBet™ kiosks now deployed in the state and mobile betting due to go live at press time, the lottery is embracing new channels and an opportunity to attract new demographics. How can other lotteries think through the many models available?
Cohen: I think what’s going through operators’ heads right now with regard to sports betting is one very natural question: Is it an opportunity, or is it a competitor? Of course, what follows is a whole bunch of related questions that boil down to “friend or foe”? The “friend” column has revenue opportunity. It has brand extension, channel expansion, and cross-marketing. The ‘friend’ column has ways to tap into people’s number-one passion, assuming the lottery runs—and doesn’t only regulate—the sportsbook. In the “foe” column, a lottery might view sports betting as competition to the core business. There’s inherent risk. There is potential loss of focus, dilution of the brand, and regulatory overhead. But the decision that lotteries have to make isn’t binary. A lottery can end up as a participant in or excluded from the commercial marketplace. If it’s the latter, there’s no direct benefit to the state’s lottery revenues, but no costs either. Another model is the one that’s been created in Rhode Island, where sports betting is a product offered by the lottery. A third model has the lottery as the regulator of, but not a participant in, sport betting, and their role is more about managing a healthy marketplace, which protects the public and the state.Over the coming decade, state lotteries will be considering all these models as they evaluate one or another—or try to block sports betting entirely. Those are essentially the choices, and there are a few states where all of the options are on the table. Every state is going to be slightly different when thinking strategically about this opportunity.
La Fleur’s: Are all the assumptions you mentioned true?
Cohen: There are certainly a few myths worth pointing out. There’s a hypothesis that sports betting has the potential to be a threat to established lotteries or any other gaming activity in the state because it will divert revenues from those activities. But all the evidence suggests that this is generally untrue. Legal sports betting diverts money in the first instance from the illegal market. And it attracts extra discretionary dollars. By the way, it’s also true that when mobile sports betting is introduced, this effect is even greater.
Sports betting has some commonalities with lottery in that it’s an impulse purchase, though the average sports wager in new states so far is much higher than lottery. The cadence is also similar to lottery: just as most lottery tickets are purchased on the day of a draw, most sports bets are placed on the day of a game. One difference here, though, is that the aggregate payout to players on sports betting is much higher than it is on lottery—it looks more like a gaming product in that respect, and the recycling of winnings from sports betting is much greater than lottery as a proportion of the stakes.
So, sports is not competition to lottery in the way that, say, Burger King competes with McDonald’s. Sports betting and lottery are different products. The two activities speak to a totally different sets of motivations and expectations, and people can derive enjoyment from both without an obvious tradeoff.
La Fleur’s: If they’re not competing, does it matter whether there’s an association with a lottery’s brand?
Gunn: This is a really interesting area. A lottery’s brand is the very definition of trust. If you look across the history of lottery, one of the reasons why lotteries are state-sponsored institutions is because they’ve earned a gilt-edged reputation of trust. If a lottery associates itself with sports betting, by definition it’s saying, “You can trust this service.” That’s incredibly powerful.
Cohen: Related to that point, lotteries also have powerful distribution networks, but it’s not essential or inevitable that a lottery offering a sports betting product will do so through its distribution channel. There are a number of good reasons why a lottery might not want to do that. One is that you don’t want to confuse the public. Two, there’s a potential burden on retailers. And three, sports wagers tend to be much larger than lottery purchases, which could create an issue for cash handling.
La Fleur’s: Even if a lottery does operate a sportsbook in a state, can there be others as well?
Gunn: That question comes back to evaluating the original factors that Charles discussed. Is the profile of the state appropriate for a single supplier? What does the lottery want? Since PASPA was repealed, sports betting has become a live topic of conversation in nearly every statehouse. Lotteries are clearly going to be a participant in all those discussions around the legalization and regulation of sports betting in their state. The companies that lotteries already partner with are all active in sports betting in some shape or form, and lotteries are aware that there are other potential suppliers who might not be familiar to them but who have something to offer. Lotteries should not lower their standards when it comes to entering sports betting. They’re going to have to choose tech partners and service providers in a world they’ve never been in before, and if they don’t apply the same rigorous standards to those partners, they would be running risks in sports betting that they would never consider in their core business.
La Fleur’s: When you talk with lotteries about the possibilities, how do you help them evaluate the situation and potential?
Gunn: Part of what lotteries want is straightforward education on the economics of sports betting, which are very different from lottery. Part of it is helping lotteries understand what goes into sports betting from an operational perspective and what kinds of things they’d have to do if they wanted or are required to be a regulator of sports betting.
Cohen: We can talk with other stakeholders—legislators, retailers, distribution partners such as casinos, other potential participants—because as a long-term participant, IGT is a member of a community, and the worst thing for our customers and for our own organization is seeing the market set up badly or in a way that creates risk for everyone. That’s the number-one concern. If you think about it, the creation of the sports betting industry is on a par with the creation of the lottery industry itself. It’s a brand new opportunity that speaks to a different customer, to growth, it speaks to people’s love of sports—it’s got everything going for it. Whether lotteries participate, regulate, or are excluded, they will be impacted. In fact, there’s an impact even if it doesn’t happen in a jurisdiction, because there’s a pent-up demand. Is there anything a state can do to serve and capture that demand? All the forecasters expect that the majority of states will have some form of sports betting in the next decade, so unless you’re in a jurisdiction with a constitutional impediment, sitting on the sidelines is probably a losing bet.
La Fleur’s: What advice would you offer a lottery, having been involved in this process for some time?
Cohen: The number-one piece of advice is this: Get relevant, expert support for your RFP process, and don’t lower your high standards. There are independent consultants and advisors in sports betting who know how to shape an RFP process for the U.S. If a lottery wants some names, they’re welcome to contact me. These consultants can help determine what questions to ask and how to evaluate the responses. Much of it is technical, very niche, and the details are important if you want to make a rational selection. The second piece of advice is to set a realistic time scale. Sports betting is seasonal. It has its own calendar, and what tends to happen is that everyone focuses on the beginning of the season or one of the big sporting-calendar events and uses that to set a deadline for go-live. In doing so, you risk not giving yourself, your stakeholders, or the public enough time to launch a good service. This is something else that would come out of RFP process.
La Fleur’s: What about the legislative side?
Gunn: Lotteries are not new to the gaming landscape, and lottery personnel have a wealth of experience that can help shape meaningful and effective policy. We can and are helping lotteries navigate the debate about sports betting within the state, but no one knows a state’s regulatory environment better than the people on the ground at the lottery. This includes how to determine the long-term impact of policy decisions and
support the legislative process. There are cases where the potential for revenue growth is substantial, but that comes with an operational burden on the lottery—and for the most part, lotteries understand this. For example, look at the regulatory model where you have to regulate an open market. A lottery organization would need to take on significant additional staff, costs, overhead, and acquire complex new skills. Many lotteries understand this and have done a good job of scaling the learning curve on sports betting, and we have done our best to serve as a resource.
If a lottery is given that role because they’re the only ones who can serve as a regulator, our job is to help them understand that role and support them in promoting good policy choices. If we can help them with best practices, it allows them to adapt a regulatory scheme that fits their particular jurisdiction, satisfy policy makers, and ultimately design a sports betting program that will be successful and appealing to players. This is not a simple job to take on, but it is one that lotteries are more than capable of fulfilling.
Cohen: There just aren’t many partners with anything close to the kind of scale and capability that will be needed as the market matures and 30 or 40 states are offering sports betting. It’s going to come down to approach, philosophy, and a service focus. IGT perceives sports betting as a service business, and we are as committed to working as a partner to our customers in sports betting as we are in lottery. That’s what will help ensure that they will continue to generate more revenues for the good causes they serve.