JOHN DONAHUE CHIEF EXECUTIVE OFFICER, INTRALOT Inc., Public Gaming, November/December 2017
U.S. Lotteries Position for Change and a New Era of Growth and Prosperity
PGRI Introduction: It was fifteen years ago that INTRALOT won its first contract in the U.S. Since then it has won contracts for the terminal-games in Montana, Idaho, South Carolina, Washington DC, Vermont, Arkansas, Ohio, and New Mexico. And contracts have always been either renewed or, if a re-bid was required, INTRALOT won the re-bid. Congratulations for what is quite the enviable record!
John Donahue was appointed CEO of INTRALOT Inc. in May of this year. This appointment follows thirty years of lottery and gaming experience in the global market. His strengths combine strategic vision with product development and technology delivery, as well as operational and sales execution. Before coming to INTRALOT, John worked for 10 years as Managing Director of the International Systems Division at Scientific Games and previously as International Sales Director and Northern Europe Sales and Operations Vice President for GTECH (now IGT) and CEO of SIRIUS Gaming LLC.
Paul Jason: Much of your 30 years of experience has been outside of the United States. What is most striking to you about the differences between the U.S. and other markets in other parts of the world?
John Donahue: There’s a much longer tradition of playing the lottery in Europe than there is in the U.S. But the lottery has grown rapidly in the U.S. over the last few decades and has made very distinct contributions towards good causes in the country. It now feels like quite a prominent part of the games-of-chance sector and contemporary life and culture in the U.S., but it hardly existed even just fifty years ago. In addition, sports-betting is an entrenched part of the gaming and lottery culture in Europe. It became an important game category from the beginning of the modern off-line lotteries some eighty years ago, preceding Lottery as a way to fund youth sports programs in many countries, and has grown in popularity ever since including significant competition from offshore internet entities.
You came into the industry in 1987, just when lotteries were beginning to convert to technology-driven platforms that connect to a central system.
Donahue: One of the transformational impacts of this change in Europe, is that lotteries could now sell tickets right up to the time of the draw. Prior to this, they had to stop selling on e.g.Thursdays in order to have time to process the tickets for a Saturday night draw. Most U.S. lotteries skipped an entire generation of this “off-line” technology and moved right into the modern era of online communications and central-based systems.
Over half the lottery revenues in the U.S. come from Instant tickets. It is much less than that in Europe. What are U.S. lotteries doing differently than their European colleagues to generate such better results in Instants?
Donahue: I believe there are many reasons for this. Culture, payout, branding, impulse, placement, etc. For one thing, the prize-payout and price point percentage for Instants in the U.S. has crept up more than it has for the Draw-games. Draw or numbers games have evolved differently e.g. Jackpot driven which is a bit inconsistent. Intralot is addressing this gap through both our fast play products, expanding the retail base, progressive jackpot products and a focus on improving the draw-based category.
In addition, through the business model U.S. lotteries involve their commercial partners in more aspects of the business than do their European colleagues. International lotteries tend to buy the technology and operate themselves – and this is fine, in the US commercial partners are enlisted to help drive performance and end-results. Contracts are designed to drive alignment so that the commercial partners can earn more money with the achievement of performance or sales objectives. We are encouraged to bring them new ideas for games and strategies to increase sales, and to drive improvements in business process to enhance efficiency and effectiveness – and more skin in the game.
There are pros and cons to both approaches. But one of the benefits of the U.S. model is that it brings in the global brain-trust of their commercial partners to help drive sales. I think the sales growth in the U.S. Instants category is testament to the benefit of applying the global experience that commercial companies bring to bear.
In addition, many European lotteries have additional products such as sports-betting, electronic games, and other products that U.S. lotteries do not offer. The more diversified the gaming portfolio, the more competition there is for spend and mind-share to promote each category – not to mention competition externally. If all you have are draw-games and Instants, then you of course focus all your resources on each of those categories and sales channels. But if you have sports-betting, VLTs, iLottery, and other games, then it may be a perfectly logical business decision to diversify your investment to develop all categories, and not focus as much on Instants.
Our goal at INTRALOT is to extract insights from the different ways business operates all around the world and apply best-practices to optimize the opportunities everywhere we operate. The transfer of best-practices certainly runs in all directions – not just between International, Europe and the U.S. but also between mature gaming markets and emerging markets.
How quickly is the monopoly model of state lotteries eroding?
Donahue: Well, much more quickly in Europe than in the U.S. Internet gaming, online sports-betting, the expansion of electronic gaming, have transformed the European games-of-chance market-place. The explosion of alternatives to traditional lottery for recreational gamers completely reshapes our approach to business. Lottery may have a monopoly in its traditional game categories, but easy consumer access to multiple gaming options is challenging the relevance of that monopoly. Add to the mix the impact of gray-market operators. The tax rate these companies pay is a tiny fraction of what government-lotteries pay to good causes. Their higher margins provide capital for aggressive marketing campaigns, for new product development and more sophisticated product delivery infrastructure, and for higher prize-payouts. It is necessary to have strong regulation enforcement to avoid illegal competition in order to preserve the contribution to the society and operate within responsible gaming frameworks. On our side we are doing everything possible to offer technologies that help in that direction through a product and services development roadmap that increases competitiveness for licensed operators and monitoring capabilities for the regulators.
But these companies operate illegally, right?
Donahue: They are often-times operating legally according to the laws of the markets where they are based and where the consumer resides e.g. they are legally licensed in an EU country like Malta or Gibraltar. They contend that the license to operate in one EU jurisdictions entitles them to operate in all EU markets as with other non lottery products. The courts continue to receive challenges to “State monopoly thinking” when t comes to lotteries, or whether or how to enforce regulatory laws. In the mean-time, the gray market operators are taking more and more of the market. That poses a challenge for all operators in the games-of-chance market-place, especially government lotteries which are required to comply with the highest and most inflexible standards. In fact, those standards are typically quite lopsided, restricting lotteries in ways that others in the games-of-chance industry are not. As in Germany, where the restrictions on lotteries’ ability to advertise are not applied equally to the other sectors, and laws regulating sports-betting are not really enforced.
As stakeholders in the government lottery industry, we all want to ensure that shapers of public policy are informed of the facts, appreciate the role that state lotteries perform in the support of charitable causes, and make decisions that serve the interests of society. At the same time, we also need to address the realities of what we are facing right now in the market-place. We need to do everything we can to continue to engage current players, attract new players, and position ourselves for long-term success in a highly competitive market-place.
Thankfully, the U.S. regulatory system seems to work well, doesn’t it?
Donahue: Yes. We are blessed with a relatively stable regulatory environment in the U.S. However, with the spread of online technologies it will be far easier to lose market share via illegal/offshore activities in areas in which Federal total bans apply today. If the federal prohibition against sports-betting is lifted, hopefully state lotteries will be able to offer those gaming products, in a regulated and responsible way that will benefit State coffers, good causes, and professional associations. Lotteries offer this segment in most other jurisdictions around the world.
INTRALOT has excelled at integrating sports-betting products into the portfolio and distribution networks of traditional lottery operators … to the point where over 40% of your revenues come from sports-betting. If or when prohibition is lifted, should U.S. lotteries pursue the sports-betting business?
Donahue: Absolutely. Good causes will be well-served by the revenues generated in the massive gaming space of sports-betting. There are lots of different sports-betting game-styles, suited for all channels but especially retail. There are lots of different ways to implement sports-betting. It is a more complicated and technologically sophisticated product category. Sports-betting is one area where collaboration between lotteries to share the investment in central systems, distribution, and consumer-facing infrastructure would make a lot of sense. For example, in Germany we subcontract one system that connects to and supports all sixteen state systems from all three primary vendors. U.S. lotteries could operate much more cost-effectively by collaborating to implement a similar system for sports-betting. But Intralot is also known for PMA-style outsourcing of the operation as well giving us an advantage in the US of both trust and skill – and we are lottery focused so we want US lotteries to have a share of the sports segment in the US.
Is there much cross-over between sports-betting and lottery players?
Donahue: Typically they are two different audiences with sport-betting appealing to younger, sports-loving audiences. This is precisely the argument about expanding by diversifying the client base and adding consumers. Regarding cross-selling now: one, the sports-betting player will often add a lottery ticket to her basket if it is made available; two, play styles do evolve over time. The twenty-something who may have had lots of time to hang out with his buddies and talk about sports and engage in sports betting finds himself in his thirties with family and responsibilities and less time. The appetite for recreational gaming is still there but the time to indulge is not. It is important for lottery to be on the radar when the sports-better comes of age and there is a little more money and lot less time.
The most important reason for Lottery to offer sports-betting is that a strong and credible network of retailers is in place. Then we must take into account that we are moving into a highly social gaming environment. The successful operators will have the widest variety of games in their portfolio. Friends will gather at home or in a bar or gaming of the future. You know that at least some of them will be betting on sports. The sports product has also evolved offering bets on events within the event, etc. The growth for lotteries could be north of 35% depending on how much we claw back from other illegal channels existing today.
Too, keep in mind that all other ancillary programs, Responsible Gaming and Loyalty Programs and all manner of CRM interactions, work best when the e.g. the lottery operator is the destination of choice for all the player’s recreational gaming activities. The operator interaction with the player is then driven by a comprehensive 360 degree view which produces the most rewarding relationship for both the operator and the player. This has been the central logic behind developing the omni-channel solutions off-course, so the same technologies can serve many verticals and create economies of scale and reduce capex.
INTRALOT has identified CRM (Customer Relationship Management) as a key competitive differentiator. The future belongs to the Amazons of the world who excel at CRM. Should registration be mandatory like it is in Norway and now Sweden?
Donahue: Registration is the first step towards the truly dynamic interactive relationship, and the foundation for an effective CRM program. But I don’t think anyone wants it to be mandatory. The Finland model in which it is voluntary but the players are incentivized to register is probably the better way to go.
To your point, though, Norsk Tipping and Svenska Spel clearly benefit by the direct relationship they have with 100% of their players. Sweden saw a slight dip in sales when they implemented required registration a couple years ago. That was a very dramatic step they took. But sales bounced back, they are growing again, and they are better positioned than ever to hold onto their players in the face of increased competition which is testament to the great power of these technologies. In the long-run, lotteries absolutely need to find ways to engage their players in the kind of CRM-based interactive relationship that is only enabled by player registration.
That is why INTRALOT has made CRM a cornerstone to its player-centric strategy. Adding other options such in-lane technologies and self-service terminals we aim at expanding the customer touch points network while cashless capabilities in our new multipurpose terminals complement the new digital shopping experience which is essential for serving our mission to modernize Lotteries for sustainable growth.