How can lotteries succeed against digital gambling competition?

I have written this text for http://www.lotterydaily.com, and Charlie Horner has partly edited it.

The summer vacation season is coming to an end here in Northern Europe, so here comes my new column after a two-month break. As you have noticed from my previous writings, I consider it important that the offer of lottery companies is competitive compared to other gambling operators. That is especially critical in digital sales channels, where a massive number of other companies offering gambling products are available to customers.

Many lotteries have thought the competition does not concern them because the company has a monopoly on lottery games. That kind of thinking has not been very harmful in a situation where the sale of lottery games has taken place in the retail channel because the customers have faced only a few other gambling offerings. However, the digitalization of business and the change in customers’ consumption behavior have changed the situation dramatically. Fortunately, most lotteries have already understood this change, and a reaction to the matter has begun.

It is easy to see from the statistics of World Lottery Association and European Lotteries that there are considerable differences in the digital business shares of the world’s lottery companies. At its peak, the percentage of digital business is more than half of the entire company’s operations. However, dozens of lottery companies worldwide have not even started selling their games on digital channels. In all cases, the reason for this is not in the company itself but the legislation of the country in question, but it does not eliminate the existence of the problem.

Some lotteries have deliberately delayed the start of the gambling business in digital sales channels. The reasons for such a decision have been, e.g., fear of the reactions of the retail channel, considering digital sales as an irresponsible activity, the “competition doesn’t concern us” idea, etc. According to experiences from several countries, the agents’ reactions to starting digital sales have been very moderate in the end, and no significant problems have followed. Lottery digital sales have not increased gambling problems. In fact, running a responsible gaming operation in the digital channel is easier to implement than in the retail channel because, in the digital channel, all customers play with identification. The “competition does not concern us” thinking is ridiculous and dangerous. Lottery activity is not a separate “business bubble” but part of the customers’ regular choice.

What do lotteries have to do in order to stay involved in the development and remain attractive in the eyes of their customers? Short-term solutions depend on the company’s current starting point. Suppose a large part of the lottery’s business already comes from digital channels. In that case, the tools for operational development are entirely different from those of a company just starting the digital business. I will return to these concrete solutions a little later.

My university professor taught us that a company could improve its weaknesses by doing the same as others but doing so does not gain a competitive advantage. A successful company always needs at least one competitive edge over other companies participating in the competition. Lotteries have had at least two traditional competitive advantages. Lottery’s retail sales channel is the most expansive gambling sales network in several countries. Lotteries have also offered the highest jackpots in the gambling market, which have interested customers. In addition, the lottery profits to the beneficiaries and the responsible brand of the companies have brought a competitive advantage. Lottery’s strengths are still there, but they are not enough because there have become too many weaknesses in the operation.

People are used to doing their affairs more and more on digital channels. Entertainment and leisure consumption, in particular, has moved quickly to the digital age. Gambling products are a product group that is very easy to sell in digital channels because games are not about the physical product. Because of this, the supply of gambling games on the internet and mobile channels has exploded during the 21st century. Customers are offered an enormous number of games that are more entertaining to play than traditional lottery games. The availability of games is easy, so customers can decide where and when to play. If lotteries do not offer games on the same principle, they will develop a competitive disadvantage. By starting digital sales, lotteries, therefore, do not gain an advantage over other gambling operators, but in this way, they prevent the occurrence of a business disadvantage.

Lottery, which is planning to start selling its games on digital channels, has a lot of help available. Benchmarking and best practices information is available from other lotteries. The traditional technology suppliers of the lottery world also offer technology solutions for digital channels. In addition, several technology providers specializing in digital channels have entered the market. In addition to the technology solutions needed for sales and running games, there are also, e.g., technologies and services related to data and customer relationships. In the end, starting operations is quite simple, as long as the legal issues have been solved.

The most advanced lotteries in the digital gambling business are hardly satisfied just being in the business. Their aim is certainly to be better than other gambling operators in at least some aspects. Working with traditional technology suppliers of the lottery world has been a challenge. Because of this, many developed lotteries have ended up in a multi-supplier situation, where companies try to use the best providers on the market in different areas and no longer acquire all technology from one supplier. The best data and customer solutions are not necessarily found in the same place as the best game technology. The same situation applies to games and related services.

New game studios have entered the gambling business, developing entertaining games those interest customers. For one reason or another, there have been far fewer new game producers in the lottery game area than in other game verticals. I know that lottery games can be developed to interest customers significantly more than they do now, also in digital channels. So far, just a few companies have realized that. I follow with great interest what, for example, my former employer Veikkaus’ new subsidiary Fennica Gaming accomplishes in this area. I believe that by developing new responsible and entertaining lottery games, lottery companies can gain a competitive advantage and succeed in the digital gambling competition.

The role of the state in the gambling industry

I have written this text for http://www.ice365.com and they have partly edited it.

In this column, I will look at the activities of states in the field of gambling, though I’m well aware that each nation has its own approach and desires for legal gambling.

For example, the EU has granted member states significant control over gambling. Because of this, or thanks to it, gambling activities in EU countries differ markedly from one to the next, more so than almost all other areas of business. 

When we assess the activities of states in the gambling business, it is worth recalling that gambling is, in principle, a potentially dangerous activity that can cause significant problems for some consumers. 

For this reason, gambling is regulated all over the world, and there is no desire to make the sector free from regulatory scrutiny. The methods and degrees of regulation, on the other hand, vary greatly from country to country.

At one end of the spectrum are countries where gambling is prohibited entirely, such as in several Middle Eastern countries, or those with Islam as the prevalent religion. 

The starting point for many other countries is that gambling is prohibited, but special permits can be issued for it.

A number of markets have permitted gambling through a monopoly model, from which it has gradually transitioned to allowing different activities from a wider range of licensed operators.

When considering the different gambling systems, it is important to acknowledge these historical developments, because this helps to explain countries’ differing approaches.

States have several different roles and interests in the gambling business. It is the entity that enacts and organizes the regulation of laws in the country, and because gambling has been a restricted activity, many states have been responsible for operating gambling under the monopoly model. 

The gambling monopolies have thus been under the direct control of the state, in which case the country has been the main beneficiary – and the profits from gambling are enormous, of course.

Hence, states have a very high financial interest in controlling and managing the revenue from gambling, which they can then redistribute to their chosen causes. Minimizing the disadvantages of gambling is also a key goal, as the state often has to cover the cost of treatment for those who suffer gambling harm. 

But with differing goals and expectations, there are often conflicts between different stakeholders. In general, there will be a variety ministries dealing with different products and verticals – there are only a few countries in which all gambling is centralized under a single ministry. 

That is why, for example, increasing financial profits and reducing the number of gambling problems is viewed as a contradiction in many countries, leading to conflicting and unclear regulatory policy for the industry.

Gambling is often divided into three overarching verticals: lottery, betting, and casino, each of which is subject to significantly different regulations. 

Lottery operations are generally still based on a monopoly system in which one company takes care of all operations. In most countries, this monopoly is still overseen by a state-owned entity. 

Betting can be split into sub-divisions: horse and sports betting. In many countries, there has been a de-facto monopoly for horse betting, where racetracks and betting operators have worked in tandem. 

This differs from sports betting, where there have traditionally been several operators competing, which has also been true of the casino business. Thus, monopoly systems have traditionally been more common in lottery operations than in sports betting and casino operations.

When analyzing European gambling regulatory frameworks, it is easy to see that the lottery business tends to have remained close to the monopoly model, rather than opening up to private operators. State-owned companies run the activities, or the state has direct ownership while awarding operating rights to one provider through a tender process. 

In contrast, monopoly systems for betting and casino operations are few and far between. Of the European countries, only Finland and Norway continue to operate all gambling activities based on a monopoly system.

As I said before, the EU has given its member states a great deal of decision-making power when it comes to gambling policy. The precondition is that the legislation must comply with the general principles of the EU and that restrictions on doing business must be justified. 

The premise is that gambling activities can be regulated and restricted to prevent gambling problems. That is an understandable and acceptable principle, but is it being put into practice?

In general, a monopoly model is an inefficient way of running the business activity and is therefore a worse system than the free competition, or in the case of gambling, a license-based model. However, a monopoly can be defended, if it can be proven to be more effective in preventing gambling problems than the license-based model. 

However, this is not backed up by studies, which show little evidence of fewer gambling problems in countries with gambling monopolies. 

But the effectiveness of preventing gambling harm cannot be the only deciding factor in the value of a regulatory model. But in an increasingly digital industry, the jury is also out on the licensing model – traditional borders no longer have the same significance as they did ten years ago. This online shift has posed regulators with challenging questions they have not yet properly answered. 

When the rationale for a gambling monopoly in an EU member state should be to prevent harm, one may rightly ask why that model is only prevalent for lotteries. After all, studies show that traditional lottery games cause little or no gambling harm. 

In contrast, online casino, particularly slot machines, is often said to be the most harmful gambling product. Yet online casinos are regulated through the licensing model almost everywhere. 

This discrepancy is explained in part by historical reasons but certainly also through states’ financial interests – the lottery has been a goldmine for many nations. Revenue from lottery games can account for around 60% of a country’s gambling spending, compared to 5% to 10% for sports betting and casino. 

The private gambling operators’ lobbying efforts, which have sought to and succeeded in breaking the digital betting and casino monopoly, have undoubtedly also had an impact. Lottery games have not been part of the product range of these private companies, so legal battles have therefore not centered on lottery operations.

What will happen in the future? I’m not even trying to answer that, but I’m sure the change will continue. 

The weight of responsibility in gambling is growing strongly, which is why states’ legislative and regulatory roles will be maintained and even strengthened. But it is important to note that states are fundamentally unsuited to owning commercially significant activities. 

It would be best for all stakeholders that states will give up direct ownership of gambling companies. If operations still need to be tightly controlled, a limited number of licenses is a better solution than a state-owned monopoly.

Can a lottery be an international operator?

I have written this text for http://www.lotterydaily.com and it is partly edited by Conor Porter.

Lottery companies have traditionally been directly state-owned or at least controlled by the states. The companies have operated in one country and mainly sell lottery games on an exclusive basis. However, the situation has changed in many ways in the 21st century. The digitalization of business has reduced the importance of traditional land borders and made it possible to start new types of business. As a result, competition in the gambling market has intensified, which has also affected lottery companies operating on a monopoly basis.

Economies of scale work very well in the gambling business. Expanding market areas will do little to increase costs for selling games on digital channels. Adding new gambling verticals to the product range increases costs one-time, but these additional costs are also marginal compared to the volume of the total operations. In economic terms, the gambling business could eventually end up in a so-called natural monopoly, with the largest company dominating the entire gambling market in the world. Therefore, there would be a very considerable economic and competitive benefit from economies of scale.

The gambling industry also seems to be of interest to companies traditionally operating in other sectors. To my knowledge, media companies, in particular, have analyzed the possibilities of expanding their operations into the gambling industry. There have even been rumors that the “Big 5” companies, or at least some of them, are considering joining the gambling business. However, there is already an internal consolidation in our industry, where technology suppliers have sought the operator’s role and a few operators have started a B2B business.

The lottery world may still be reasonably at ease, but there are already many signs of a change in traditional activity in our area as well. Most lotteries have started selling their games on digital channels, several companies have expanded their product range beyond lottery games, technology vendors operate games in several markets, ownership of lottery has been shifted to private investors, and Lottoland-type companies have mixed up the monopoly on traditional lottery games.

How should lotteries react to a changed situation? Traditionally, the lottery world has sought to resolve issues through legislation, which has been primarily a defensive struggle in which states have sought to secure the status of their “dairy cows” through laws and regulations. This kind of thinking is still prevalent in many countries, but luckily, lotteries have also been able to change. Keeping up with developments requires a critical review of your own operations and the ability to make the necessary changes. Many times an attack is the best defense. So could lotteries take over from other markets?

As I have said in my previous columns, defining a lottery is pretty challenging these days. The product ranges, operating principles, and ownership bases of the companies in the lottery organizations (EL, WLA) are very different. At the extreme are directly state-owned companies that sell lotto games and scratch cards only through retail channels in their own countries. On the other side are privately-owned companies that operate all gambling products in all channels and many different countries. Therefore, the operation of lotteries cannot be generalized in any way. I will now focus on that other extreme, the members of the lottery world who have entered the international competition.

Among the member companies of the European Lotteries organization, there are at least three different types of models to implement internationalization. The ownership base of lottery companies has changed, and private investors have joined. An example of such a change is the public listing of the French lottery operator FDJ on the stock exchange, in which state ownership of the company fell to a 20-25% level. Another even fresher and more interesting example is the acquisition of SISAL, an Italian company in which Flutter Entertainment, one of the giants of the gambling world, became the owner of the lottery company. Another change occurred years ago when another traditional Italian lottery operator, Lottomatica, and technology supplier IGT (GTech) merged. The FDJ, SISAL, and IGT have in common doing the gambling business in different roles and different countries.

FDJ and IGT are also examples of another way for lotteries to go international. These companies sell gambling-related technology to other gambling companies. For IGT, this has been the company’s core business, but for the FDJ, it is a significant change in which the traditional lottery has expanded into another industry. Years ago, the FDJ made acquisitions to acquire technological know-how aimed at developing better tools for its operations. As FDJ developed a larger entity from its technical solutions, the company established a new subsidiary, FDJ Gaming Solutions, to sell these technologies primarily to other lotteries. An example of a similar type of business is Camelot, which operates the UK lottery on an exclusive basis but at the same time sells technology and consulting services to other lotteries through its subsidiary Camelot Lottery Solutions. The newest entrant to such activities is my former employer Veikkaus, which has a monopoly on all gambling in Finland. Fennica Gaming, which is 100% owned by Veikkaus, started operations a month ago, and the company’s goal is to sell self-developed games and technology to other gambling companies.

A third exciting model for implementing the internationalization of gambling is to expand B2C operations to other countries. The best example of this in the European lottery world is the Czech lottery company SAZKA, which currently operates internationally under the name Allwyn. The company has bought holdings in several European lotteries. In addition to the Czech Republic, Allwyn operates in Austria, Cyprus, Greece, and Italy. In addition to these, the company is competing for the UK lottery license with Camelot and SISAL. At least Allwyn is not yet in a position to take full advantage of economies of scale in its lottery operations, as the laws of the countries in which it operates do not allow this. However, the situation could change significantly if the lottery business moves from a monopoly to a license-based system.

It is already clear that a company operating a lottery in a country on a monopoly basis may also operate internationally. That, of course, requires a group structure in which international operations are handled through another company. Therefore, expansion of the business is possible, but it involves, e.g., significant competition law challenges, at least as long as the lottery operates under a monopoly. It is interesting to note that the most active expanders have been the forerunner and most advanced lotteries. Does this mean that others will follow them in this area as well?

Will Finland’s new Lottery Act reduce gambling problems?

I have written this text for http://www.lotterydaily.com, and Charlie Horner has partly edited it.

I start 2022 by writing about the situation of my home country’s Finnish gambling system. Less than a year ago, I wrote about the proposed new Lottery Act, which was after that in the EU‘s notification process until August. The Finnish Parliament passed that new law just before Christmas, and the law came into force on January 1st, 2022. A few points in the law have been given a transitional period, which is why some of the reforms will be implemented later, at the latest, during 2023.

The government has stated that the purpose of the new Lottery Act is to help Finland maintain its monopoly system of gambling and at the same time enable the reduction of harm caused by gambling. In the past, the de facto goal has also been to optimize the revenue collected from gambling for the state and its beneficiaries, but now it seems that this goal has been abandoned. Responsible gaming is thus a clear new main goal of the Finnish gambling system. However, I am not sure that the new law will help achieve that goal.

Before I justify my view that the new law is not a good solution, I will go through the things that change with the law in Finland. With the new law, the operations of offshore gambling companies in Finland will be even more difficult. Finnish customers are still allowed to play to foreign gambling companies, but the companies are not permitted to market and have sales operations in Finland. Marketing restrictions now also apply to individuals, and that change is intended to prevent social media activity, mainly from celebrities. Concerning the marketing ban, the challenge is that the law does not define what is considered marketing and promotion in sufficient detail.

The gambling regulator, the National Police Board, maintains a blacklist of companies that it thinks have violated the marketing ban. If the gambling operator does not change the activity that the regulator has deemed illegal, the company will be blacklisted. Finland plans to introduce payment blocking from the beginning of 2023, which will prevent Finnish customers from transferring money to offshore gambling operators. Banks and payment service providers must prevent money transfers to those companies that have been blacklisted in Finland. The aim was also to prevent money transfers in the other direction, i.e., from gambling companies to customers. However, this blockade could not be enforced because, according to the interpretation of the Constitution Law, customers are entitled to winnings from their legally played games. As gambling for offshore companies is still legal, the payment of wins cannot be blocked.

It may appear that the new Lottery Act seeks to protect the operations of the monopoly operator Veikkaus. However, that is not the case in practice. There will be more restrictions on Veikkaus‘ operations. The company’s marketing will be restricted, there are maximum limits for gambling, by the end of 2023, all gambling will only be possible for registered customers only, the number of slot machines will be reduced a lot, etc. All these measures aim to reduce gambling problems. 

The above measures have already caused a significant decrease in Veikkaus’ revenue. A few years ago, the Finnish state and beneficiaries received about 1.2bn euros a year from gambling. Now that amount has already fallen to around EUR 700m, the new law will not improve the situation. Finns have been highly supportive of the gambling monopoly system. An extensive network of beneficiaries has received a monopoly revenue of around EUR 1bn a year, and that network has been the main reason for defending the monopoly system. Now the reasons to support the system have at least diminished significantly.

Veikkaus will receive some slight relief for its operations with the new law, but their total revenue-increasing effect will not exceed, even in the best case, a few tens of millions of euros. In addition, Veikkaus will now have the right to establish a subsidiary focusing on the B2B business, which is expected to generate tens of millions of euros in annual revenue in the long term. The new company will likely focus on selling games and supporting technology solutions to other gambling companies, mainly lotteries. I cannot comment on this matter neutrally because the disagreement over the content of the operation was the main reason for my resignation from Veikkaus. In any case, I wish Veikkaus good luck with the new company’s operations!

Therefore, the new law will be detrimental to offshore companies, the monopoly company Veikkaus and its current beneficiaries. Even from the point of view of ordinary customers, the law causes at least some difficulties, and there is nothing particularly good about it for the customers. However, the new Lottery Act can be a good solution if it helps achieve the state’s biggest goal, reducing the number of gambling problems. Finland has now clearly chosen a line in which the income from gambling no longer has the same significance as before. Veikkaus has been balancing between conflicting goals, while the state has expected more revenue and fewer gambling problems at the same time.

The critical question is whether gambling problems will decrease in Finland with the new law. I hope so, but I’m not sure at all. According to official research, about three percent of Finns suffer from gambling problems and less than one percent from serious ones. That level of gambling problems has remained roughly the same throughout most of the 21st century. Veikkaus runs its own unofficial monitoring of gambling problems. According to the company’s study, the number of gambling problems has dropped to just a 2 percent level during the Covid-19. Most of Finland’s gambling problems are due to slot machine operations. Now, reducing the number of slot machines, allowing only registered customers to play them, and temporarily shutting down those devices because of Covid are likely to have reduced the number of problems. According to the new law, Veikkaus can still keep slot machines all over Finland in so-called open spaces, such as supermarket lobbies, cafés, and petrol stations.

In the current monopoly system, the possibility for the regulator to control is limited to the monopoly company. With the new law, the regulator will also have some tools and resources to intervene in the operations of offshore companies. About 1/3 of Finland’s gambling is already played at companies other than Veikkaus. In digital channels, the market share of offshore companies, including PAF from Åland, is already about half. Veikkaus’ market share is no more than a quarter in some product groups, such as fixed-odds sports betting. Gambling limits thus do not extend to offshore companies, so no one has an idea of the volumes of gambling by individuals and cannot control it. In that situation, it is challenging to prevent potential gambling problems.

Finland will hold parliamentary elections in April 2023. We will not receive official information on the effects of the new Lottery Act on gambling problems before that, but hopefully, we will have some idea about it. The money received by the beneficiaries will probably no longer come directly from Veikkaus’ profit from the beginning of 2024. Thus, if the gambling problems do not diminish, the beneficiaries no longer strongly protect Veikkaus’ monopoly, and the market share of offshore companies continues to grow, then the probability that the new parliament will decide to change to a license-based system is very high. I predict that Finland will follow the path of Sweden in about five years.

Horse betting in the lotteries product portfolio

I have written this text for http://www.lotterydaily.com, and Conor Porter has partly edited it.

Traditionally, horse betting and lotteries have not belonged together. The gambling business is almost everywhere based on a model in which gambling is divided into three or four different areas of activity. Casino operators have run casinos and in recent years, also online casinos. Betting companies have operated sports betting, including in many cases, horse betting. 

On the other hand, there have also been separate horse betting companies in the market that have taken care of on-track betting and later also online horse betting. In addition to these, there have been lottery companies whose product range has included lotto games and scratch cards. The product range of lotteries has expanded to sports games in many countries, and in some cases, to casino games and horse betting.

As we know, the consolidation of the gambling industry is happening at a rapid pace. New operators from outside the gambling industry have entered or are entering the industry. In addition to this, the division within the industry is breaking down. More and more operators today offer almost all different product groups for gambling. The digitalization of operations and online sales have made this more accessible than it was in the old retail channel model. For example, many traditional sports betting operators now make most of their revenue from casino games. Several lotteries have also realized that they have the potential to succeed in the competition if they expand their business to other gambling verticals.

Customers’ demands on businesses have grown tremendously. Companies can no longer succeed with old-fashioned operating models. Products should be available where customers are anyway. That has placed great demands on the digitization of operations. It is already impossible to do an effective gambling business in many countries without an online sales channel. For example, about half of all gambling sales take place on digital channels in Nordic countries. Customers also seem to prefer companies from which they can buy all products from one place. This implementation requires expanding the product range to cover all major product groups. The competitive advantage of lotteries is so far quite strong, as private operators have not found a sensible way to offer lottery jackpots. However, lotteries should also be active and expand their product range to other gambling verticals.

As I said earlier, lotteries don’t easily come to mind when you think about horse betting. When you look at it a little more closely, the image turns out to be at least partially wrong. One member company of the World Lottery Association (WLA) is the Hong Kong Jockey Club (HKJC), one of the world’s largest horse betting companies. In addition to HKJC, WLA’s member companies include dozens of lotteries that also offer horse games. In Europe, companies like SISAL, IGT Lottery, Veikkaus, Loterie Romande, Svenska Spel, and Danske Spil have horse betting in their product portfolio. According to the experience of European companies, customers who actively play horse betting also play other games offered by lotteries and are therefore very profitable customers.

The WLA recently added an interesting new member company in Europe’s biggest horse betting company, the French PMU. PMU has been working closely with lotteries, mainly in French-speaking countries, for a long time. Several of the lotteries in the French-speaking countries of Africa sell PMU horse betting, which accounts for a large proportion of the total revenue from those lotteries. PMU also cooperates with European lotteries at two levels, commingling and technology.

The strength of lotteries compared to other gambling operators is the large number of customers and the tradition of cooperation. As we know, the big lottery products in North America and Europe are the result of collaboration. Individual lotteries could not have produced products like Euro Millions and Powerball. In such pool-based products, collaboration allows for huge jackpots. The same model could work in the area of horse betting. Lotteries have an extensive customer base and sales network in their own countries. When combined with an exciting product, there is a “winning combination” in size. Of the WLA members, both HKJC and PMU already have betting products that would seem to appeal to customers of other lotteries.

Last week, WLA organized a horse betting webinar, where lottery companies were introduced to the World Pool horse betting that is already up and running. Lotteries from countries where horse racing is a popular sport should consider joining that World Pool game. The easiest way to expand your product range to the field of horse betting could be to work with PMU. I believe that other member companies in the lottery world that already run horse betting are also ready to help other lotteries join.

The development where lotteries are getting involved in the horse betting business is exciting to me personally. My gambling business career started with a horse betting company, where I had time to be the CEO for a while before joining the lottery company. I’m still an active horse bettor and involved in Board-level horse racing activities here in Finland. That’s why I think I’m qualified to help lotteries who want to understand the potential of horse betting. So, I’m ready to help if contacting the giants of the lottery world is not the most interesting option of all.

Lottery license bidding

I have written this text for http://www.lotterydaily.com, and Conor Porter has partly edited it.

Lottery gaming is still based on a monopoly system in almost all countries. At the same time, however, the activities of other gambling verticals are based in more and more countries on a licensing system with dozens or even hundreds of gambling companies. Is the traditional monopoly system based on law already too old-fashioned to conduct lottery activities?

Gambling operations cause significant problems for some customers. It is therefore up to society to restrict this activity. The situation is the same as in alcohol and tobacco businesses. In the area of gambling, states have decided not only to regulate operations but also to own the companies that run the lottery business by themselves. From this background, state lotteries have emerged, in which the state acts as the owner of the companies. In some cases, state lotteries are part of the state administration and do not operate like regular business ventures. In such a situation, there is certainly no attempt to maximize business results.

The interesting question is, why have states ended up controlling lottery businesses in particular? From society’s point of view, the starting point would seem to be the precise regulation of hazardous activities. In gambling, however, the situation appears to be just the opposite. The most problematic activity for players, casino games, has always been in private business in most countries. The next most dangerous area, betting, has also moved into the normal course of business almost everywhere. Of course, states continue to control these gambling areas through legislation and regulation, but there is no longer any state’s direct ownership of these activities – if at all. In contrast, the situation is different for the least problematic gambling vertical, lottery games, the situation is different – why?

The European Court of Justice has outlined the justification of the gambling monopoly system for EU countries. According to court rulings, Member States are free to decide on their gambling legislation as long as the rationale for the schemes is credible. A monopoly system can be a legitimate model for carrying out gambling activities if the primary purpose is to prevent problems related to gambling activities – problem gambling and criminal activities (including money laundering). According to the ECJ, fiscal targets, gambling revenues are not legitimate for a monopoly system. Against this line, it is fascinating to consider how and why rather dangerous casino activities are much less under the control of Member States than reasonably harmless lottery activities.

I’m not even trying to be a lawyer, so I’ll stop legal reflection on this. However, it is interesting to think about how states should organize lottery activities to meet legal requirements while still generating significant revenues for states. I do not favor full liberalization / licensing of lottery activities, although, in principle, I favor a free-market economy. There are usually so many gambling companies in a free competition that the business is decentralized to several operators. In lottery games, this would not necessarily be in the interest of customers because, in lottery games, the big jackpot is the primary motive for playing. In a competitive situation, the size of the jackpots would collapse compared to the current monopoly situation, and I do not consider that to be a good thing for customers.

In my current role as a gambling consultant, I have had the opportunity, for a small part, to be involved in the lottery exclusive license bidding process in a couple of countries. That is, in my view, the best way to combine the monopoly system and the market economy to preserve the legal legitimacy of the system and optimize the revenue on the operation. The bidding process would also avoid the strange situations in which countries have given privately-owned companies the exclusive right to run lottery activities. I have wondered why no one has questioned such cases, which are numerous in Europe, for example.

Bidding for a lottery license is undeniably a very laborious process. The UK is probably the most famous country that uses the lottery license. There, the license is in principle granted for ten years at a time. If I have understood correctly, Camelot UK, which has had the license since the beginning of the system, starts preparing for the bidding about a couple of years before the expiry of the current license. Dozens, unless the hundreds, employees will be involved in preparing tender documents, and costs are indeed very high. I have heard that the tender documents have contained more than 1,000 pages of text per participating company. It is also a tremendous job to evaluate the offers and decide who will win the license.

However, the bidding model seems very good otherwise. The competition will help to preserve the best aspects of lottery activities while at the same time dismantling the dual role of states. The state acts as a self-regulator in a traditional monopoly system, which is not the best possible situation. It is certainly challenging, if not impossible, for states to forget the importance of lottery revenues when making regulatory decisions. In a competitive-based model, this can be expected to be more accessible.

I know that there has also been criticism of lottery licensing in the UK. I think that the participating companies present their estimates of revenue development during the licensing period, which has a reasonably significant weight in selecting the licensee. However, I assume that that return estimate is not a promise of any kind. If the winning company does not produce the amount presented to the state, it will face no financial consequences. Admittedly, there may be some inconvenience in getting the following license.

No system is perfect, but I still see lottery monopoly licensing as a model that other countries should seriously consider. It would be interesting to consider a similar model, based on a limited number of licenses, for other gambling verticals too.

Development of Finnish gambling situation – August 2021

I have written this short analysis of the Finnihs gambling situation together with my business partner Reijo Anttila.

Market situation H1/2021

  • The Covid-19 has continued to have a negative impact on gambling activities in Veikkaus’ physical channels. Gaming arcades and slot machines have had to be partly closed.
  • Compulsory identification-based gaming of physical slot machines came into force in the decentralized slot machines in January 2021. That will significantly reduced Veikkaus’ gross gaming revenue.
  • Mandatory identification of slot machines in Veikkaus’ own gaming arcades came into force in July 2021. The foreign slot machines used by Veikkaus did not have an identification feature ready. As a result, these slot machines had to be closed in Veikkaus’ gaming arcades. Slot machines will be reopened when it is possible that customers can identify themselves in those machines. According to unofficial information, the customer’s obligation to identify himself has collapsed the gaming margin accumulated in Veikkaus’ gaming arcades.
  • Veikkaus started collective bargaining in August 2021. According to the company’s announcement, its purpose is to reduce approximately 200 jobs from the point-of-sale organization. In addition, the company is working to make organizational changes for hundreds of its other employees.
  • In September 2021, the gambling limits for digital, fast-paced gambling will be extended to include slot machine gaming at the physical point of sales. That will further reduce Veikkaus’ revenues. Until now, physical slot machines have been allowed to be played as much as customers want, but in the future, the player will have to set a limit on both daily and monthly consumption. According to the experience of the digital channel, the limits will be set tight. It is estimated that there are tens of thousands of problematic slot machine players, and playing of that group will go down a lot. It is quite possible that some of the declining gambling is likely to move to the digital gambling services of offshore operators.
  • According to information obtained from various sources, the gaming revenue of offshore companies in Finland has been growing strongly during the Covid-19 period.

Gambling in Veikkaus’ physical channel, in particular, is undergoing a considerable change. According to Veikkaus’ H1 / 2021 interim report, only 45 % of gambling took place in the physical channels, and 55 % came from digital sales. In 2019, the physical sales channel accounted for almost 60 % of total sales. At present, about 65 % of all Finnish gambling takes place on digital channels. Within a couple of years, that share will exceed 70 %.

Drafted Lottery Act 2021

  • The project to reform the Lottery Act in accordance with the Government Program was launched in January 2020, when a preparatory working group was appointed.
  • The working group completed the proposal in late 2020. Opinions on the proposal were given in early 2021.
  • The critical points of the drafted law are:
    • The law provides for payment blocking to limit the availability of offshore gambling. Blockings are targeted at gambling companies that market in violation of the Lottery Act. The law does not define what is considered illegal marketing. The regulator (the National Police Board) makes an interpretation. The regulator maintains a “blacklist” of illegally marketing gambling operators. Banks and payment service providers are required to block payment transactions to “blacklisted” gambling companies.
    • Provisions on mandatory player identification are added to the law. In the beginning, of course, this only applies to Veikkaus’ operations, but it can be considered a policy that will be valid later also in a possible licensing market situation.
    • A provision is added to the law to extend the decision prohibiting the marketing of gambling that violates the Lottery Act to natural persons. In addition, there will be the possibility of imposing an administrative penalty fee for marketing in breach of the Lottery Act.
    • According to the bill, Veikkaus will be allowed to market horse and sports betting, even though they are considered to be gambling products that can cause significant gambling problems.
    • The law specifies the provisions concerning Veikkaus’ marketing and supervision of the implementation of gambling. In addition, conditions on the placement and self-monitoring of slot machines will be added to the law.
    • The Act adds provision on the possibility for Veikkaus to establish a subsidiary engaged in business between companies (B2B) for non-gambling activities and on the conditions and restrictions concerning the subsidiary’s operation to be installed.
  • The drafted law was sent at the end of April 2021 to the EU notification process. The start of the EU process was so urgent that the opinion of the Legislative Evaluation Council was not available before the process started. A subsequent opinion of the Evaluation Council noted several shortcomings in the preparation of the law. Particular attention will be paid to the fact that the preparation work has not explored other possible options (e.g., legislation based on a licensing system). The explanatory memorandum to the Lottery Act also lacks financial calculations and impact assessments of the law to the operations of the Åland-based PAF company.
  • In July 2021, Malta issued a “detailed opinion” on the law in the context of the EU notification process. The “detailed opinion” challenges the Finnish state to justify the necessity and proportionality of the decisions. Finland has three months to give its answer and make any necessary changes. Although the measures in the law appear to be significant in order to achieve the stated goals, the result is probably that the bill will be essentially the same for consideration by parliament. According to unofficial information, Finland has already answered and apparently made only minor changes to the bill. The law is expected to be submitted to the Finnish Parliament in the coming weeks – in September 2021.
  • The probabilities of whether a proposal will go through at all, whether it will go through as it is presented, or whether it will go through modified will vary all the time. The collapse of Veikkaus’ financial result favors rolling the change in the law on a tight schedule. The outcome of the changes in the law will not significantly change the situation. So, a serious debate on the transition to a licensing system is ahead in any case.
  • According to the information, it seems certain that the current model, in which the beneficiaries’ revenue is directly linked to Veikkaus’ income, will be dismantled. A working group has been appointed to prepare for the change, which is expected to present a proposal by the end of 2021. The goal is for the change to take effect from the beginning of 2024. Breaking the direct link between the beneficiaries and Veikkaus’ income also requires an amendment to the Lotteries Act. As a result, the law will have to be reopened in either 2022 or 2023. In this context, it is theoretically possible that other significant changes could be made to the law.

Political situation

  • Political turbulence is severe. The governmental program binds government parties, but the situation is difficult due to Veikkaus’ revenues collapse. Politicians would like to support Veikkaus’ market position, but there are no ways to do so. According to current information, the Lottery Act is going to be accepted in parliament. However, there has been debate about the rationale for monopolistic gambling legislation, and MPs, also from governmental parties, have expressed differing views.
  • The connection between Veikkaus and its beneficiaries will be severed by 2024 at the latest. Before that, the state subsidy received by Veikkaus’ beneficiaries will already decrease considerably. Veikkaus’ revenues will be transferred to the state budget, from which the beneficiaries’ grants will be paid in accordance with the budget decisions made by the respective government.
  • A political debate has begun on changing the entire gambling system. Veikkaus’ market share of all Finns’ gambling will fall below 70 % in the coming years. In digital channels, Veikkaus’ market share is close to 60 %, and in the competitive gambling product areas (casino games and fixed-odds betting), it is estimated to be only about 35 %. Based on these developments, it is no longer sensible and possible to continue with a monopoly system. The question is mainly at what stage the system will be converted to license-based and what kind of multi-license system will be created.
  • It is unlikely that the next Finnish government will decide to continue with the gambling monopoly system. The next population survey on gambling problems will be conducted in 2023. It is assumed that the number of gambling problems will not decrease significantly in that survey. Reduced slot machine gambling lowers the gambling problems experienced to some extent. It is doubtful that this effect will be seen in the population survey, as the share of digital gambling has exploded in both gambling and the number of gambling problems.
  • The share of digital gaming in Finland’s total gambling will soon reach 70 %. Veikkaus’ market share of that gambling has fallen rapidly to 60 %. In certain competitive product areas, Veikkaus’ share of gambling is already at a very low level; for example, in fixed-odds sports betting, it is estimated at only about 25 %. In such a market situation, the monopoly system can no longer continue.

The purpose and future of lottery organisations

I have written this text for http://www.lotterydaily.com, and Conor Porter has partly edited it.

During my one-and-a-half year consulting career, I have mainly worked in lotteries and related matters. I have been surprised that even those who regularly cooperate with lotteries talk about lotteries as if they were somehow a homogenous group of companies. This is by no means the case. Understanding this is important both for the lotteries themselves and for other companies working with lotteries, as I wrote in my previous column.

Most lotteries are members of the World Lottery Association (WLA). In addition, the same companies also belong to similar continental organizations. Here in Europe, that regional organization is called The European Lotteries (EL). 

The WLA is an international, member-based organization of state-authorized lotteries, sports betting operators, and suppliers to the global lottery industry. The EL is the umbrella organization of national lotteries operating games of chance for the public benefit. Based on the organizations’ definitions, it can be concluded that the common feature for the members is to run lotteries under state license so that the profits are directed to charitable purposes.

Even a superficial analysis of the member companies reveals that there is no real common factor for the companies. All companies run lottery games from a monopoly basis in their jurisdiction, but even that is not the case. Some of the members of the organizations are gambling companies whose product range does not include lottery games at all. 

Another common factor identified in the definitions is revenue-sharing for public benefit. This is true in principle, but similarly, for example, other gambling companies operating under a state license can declare that they support state-decided targets with their gaming revenues. Only part of the profit of companies belonging to lottery organizations goes entirely for public benefit. In practice, therefore, it is not a common factor for member companies either.

EL has sought to promote the advocacy of its member companies towards the EU. This has, in principle, been an important area of activity, although around 30% of the organization’s members are not located in EU countries. 

What has the EL sought to promote towards the EU? In practice, the activity has been mainly the monitoring of EU legislation and the European Court of Justice decisions. The actual advocacy work has been difficult to do because the members of EL do not have a common will on things. 

EL lotteries are so different, and lottery/gambling laws vary so much from country to country that the target states of lotteries differ too much. It would be possible to find different subgroups within the EL that could have a common will to regulate at the European level, but such a will certainly cannot be achieved as a whole.

WLA has not even sought to influence social issues. The role of that organization is mainly to gather information, commission research, and organize seminars. These are, of course, important things for member companies, but those tasks could very well be done by someone else. WLA seminars, especially the biennial congress, are excellent networking venues for lottery directors and technology companies working with lotteries. These events strengthen the cohesion of the “lottery family,” but they do little to benefit the overall operation.

The problem with lotteries has been the desire to stay separate from other gambling operators. Lottery operations have been preferred to betting and especially casino games. From the point of view of gambling problems, this has certainly been justified. On the other hand, the majority of EL’s member companies now have sports betting operations. On top of all that, about 20% of EL companies run casino games. So there is no reason to say that lotteries are better than other gambling companies. Some of the lotteries are among the most responsible gambling companies globally but by no means all.

How, then, should lottery organizations be developed? The answer to the question depends on what the action is intended to achieve. Organizations may continue to exchange information and hold seminars within the framework of competition law. However, it is unnecessary to expect significant improvement in companies’ social and economic situation from such activities. Each company must be able to take care of advocacy work in its own country. However, such activities will not meet the biggest challenge in the gambling industry, which is to enhance the industry’s reputation.

If the lottery industry wants to make a difference, it has two options. Within the industry, it is divided into smaller homogeneous groups that can then pursue common goals. Such groups are more influential than individual companies, but are they strong enough actually to influence issues at the continental level? 

Another option is a cooperation between gambling organizations. I think it is possible that, by working together, lotteries and casino companies could improve the operation and reputation of the entire gambling industry. The aim of cooperation could be, for example, clear definitions of legal and illegal gambling activities. This could help improve the reputation of legal gambling, which would boost the operations of member companies.

One size doesn’t fit all

I have written this text for http://www.lotterydaily.com, and Conor Porter has partly edited it.

I’m sure you know the t-shirts sold in tourist stores, the size of which is stated as “one size fits all”? I’ve always wondered how stupid people are when they buy shirts that don’t look good on anyone. Similar examples of selling the same product can be seen in all industries. The selling company focuses on lowering the cost level and seeks large economies of scale by keeping production in one or a few products. However, such a business strategy can only produce bulk products that are not of great importance to customers.

I have written several times in my previous columns about how important it is to understand customer needs. With the data collected from customers, companies can offer even better products and services which, in turn, increase business profits. When successful, customized products are an actual win-win situation where the company receives more revenue, but at the same time, customer satisfaction increases.

Lotteries, especially in the field of lottery games, sell their products to such a large number of customers that, at least in theory, one product fits all thinking might even work. Such a product suitable for everyone should be developed with the average customer in mind. If the customer base is large enough, then the average product may be of interest to a sufficiently large customer group. A lotto game focusing on the jackpot could be such a product, for example. The smaller and more heterogeneous the customer base, the more difficult it is to develop a single product that suits everyone.

However, the actual topic of this column is not the products and services that lotteries offer to their customers. Instead, I would like to highlight the challenges of action between gaming technology suppliers and gambling operators. Based on my previous experience with lotteries and now through additional information obtained through consulting, I argue that some kind of “interpreters” would be needed between operators and technology companies to understand each other better. It may be that there should be similar “interpreters” within gambling companies between business and technology people.

I admit that I see the situation perhaps too much through the eyes of the lottery. In any case, it seems that a large percentage of gaming technology companies are looking to sell the same product and the same technology solutions to all gambling operators. Like in the B2C business, customers are different in the B2B business; clients are different and have specific businesses. The understanding seems to be enough for casino companies, betting companies, and lotteries to belong to different series. Instead, it seems surprisingly difficult to understand that lotteries are a completely heterogeneous group of companies. Sure, some lotteries resemble each other more than others, but a business-oriented, stock-listed lottery needs something other than a lottery like a state office.

I’ve talked a lot about the need for lotteries to develop their digital business and, on the other hand, the need to add new product verticals. As such, an excellent digital platform may be too complicated for a company starting a digital gambling business, while the same solution may be far too simple for a lottery that has been running digital operations for years. Technology companies should understand the levels at which different gambling operators are in different areas. Based on this understanding, it could be easier to tailor individual solutions to companies. The situation is thus quite similar to B2C, where the aim is to offer players personalized products and services. In reality, those products are not made individually for each customer, but the goal is to create a feeling for the customer that this is just for me.

Take, for example, the product area of betting. A technology supplier seeking to sell its betting solution to lotteries must understand at least the legal situation in that target country, the current state and strategic importance of sports games in the entire operation of the lottery, and the technology architecture of the gambling company. The legislation affects many issues and may impose specific requirements that make basic solutions impossible in that country. The needs of sports games are different for start-up companies than for a company operating in this product area for a long time. It is also possible that some lotteries just want to offer sports games to serve their customers, while other lotteries strive to make the maximum profit out of sports games as well.

For a lottery that wants to add betting to its product portfolio but still intends to focus on running lottery games, the full-service solution is perfect. The technology must meet the requirements of the country’s legislation, but it does not have to have any specific business specialties. The reliability of technology is a crucial element. In addition to the basic technology, there is also a need for ready-made odds, usually obtained from large companies focused on them through a revenue share agreement. Selling such a total ready-made package to large lottery companies running sports games, on the other hand, is entirely pointless. Many lotteries operate in sports games in the license-based market, where they compete openly against other operators. In a situation like this, you can only succeed by doing things differently, better than your competitors. That requires tailored services and also, at least in some sports, different odds from other companies.

Understanding IT architecture is an exciting area. Traditionally, lotteries have purchased their technology solutions from a single supplier. Lottery technology solutions have been based on a model where the central gaming system has been at the heart of it all. However, the situation has changed, at least for more advanced lotteries. The companies source the best solutions for different areas from different technology suppliers. Therefore, system integrability is of great importance to such companies. Instead, traditionally operating lotteries still want to buy all the technology from one supplier. It goes without saying that it is not worth trying to sell the same solutions to such lotteries.

As more and more lottery companies have switched to a multi-vendor model, technology companies have also changed their operating methods. However, I believe that suppliers still have a lot of opportunities to improve their service if they better understand the situation and needs of their customers. As I said above, the result of such action is, at best, a win-win situation where the technology company gets more sales, and the lottery is even more satisfied. In fact, there is still a third win in this model, as lottery players are also likely to be happier than they are today with better products.

Social elements improve the customer experience

I have written this text for http://www.lotterydaily.com, and it is partly edited by Conor Porter.

In my previous columns, I have repeatedly emphasized identifying and understanding customers’ gambling motives. If and when lotteries want to improve their operations, they need to understand their current and potential new customers. Why is someone already gambling, and how can it potentially affect the acquisition of new players? Customer understanding also helps to target the products and services that are best suited to players. Based on the same information, individually responsible gaming can also be made more efficient.

The motives for gambling can be summarized in three or four main themes. For lottery games, the most significant reason is dreaming. The other two major motives are entertainment and habit. The fourth motive is partly related to the previous ones, and it is linked to sport. Studies show that charity, for example, is the most significant reason to gamble with only a small number of customers.

The motives of an individual customer to gamble vary by time and place. The customer can dream of a Euro Millions jackpot on Friday. On Saturday, the same customer can leave his lottery ticket as he has done for 20 years. When there is an interesting football match on TV on Sunday, the customer bets a few euros to get a little extra excitement to watch the game.

Most lotteries have workable solutions to fulfil their dream motive. Lotteries continue to offer the biggest jackpots in the gambling world, allowing people to dream of a significant change in life, even if it is not very likely to happen. Lotteries also have enough to offer for smaller dreams. You can buy a scratch card for a few euros to win thousands or tens of thousands of euros.

A large number of lotteries have also started to offer sports games. On the other hand, entertainment-related qualities are not, at least not yet, the strength of lotteries.

A significant factor in entertainment is social interaction, which can happen through a physical meeting or in a digital environment. However, it is important to share experiences and do things together with other people. People need to enjoy the things they do. How have gambling companies and, above all, lotteries managed to take these things into account in their offerings? Undoubtedly not very well, but there are many opportunities.

There are many ways to support social communication related to gambling. Not all customers have switched from a retail channel to a digital channel, as you can still meet familiar salespersons and other players at the points of sale, with whom you can talk, eg, gaming-related matters.

Gambling is still a way for many customers at points of sale. The customers have been able to leave their lottery tickets at the same point of sale for decades. Lotteries generally still have an extensive sales network, the only purpose of which is not to make a profit but also to meet customers. For the same reason, acquiring new customers is easier in the retail channel than in the digital channel.

One workable solution to increasing social collaboration in gambling is syndicate gaming. Gambling companies offer opportunities to participate in gambling together with friends or family. There are also point-of-sale syndicates where customers can buy shares of big games. Selecting numbers and bets, thrilling results, and sharing experiences with other team members are elements that enhance the customer experience and make gambling more entertaining than playing alone.

It is also possible to add social elements to gambling in digital sales channels. In digital channels, it is also possible to offer syndicate portions generated by the gaming system. Customers can also create their own parties and play games together. Some lotteries have already created platforms where party members can discuss games and participate in gambling-related competitions. It is also essential for gambling companies to offer these services on a mobile channel, as increasing digital gambling occurs on mobile. On top of all that, people use mobile a lot for all other communication.

Gambling companies, including lotteries, are increasingly competing with each other, as are companies offering social and casual games. Gaming companies that provide entertainment games have always made their games entertaining, and those games often also contain social elements. Many casual gaming companies are consciously striving to approach the world of gambling. There are tons of sites where customers could play social/casual games with the possibility of winning real money. In most countries, direct cash winnings are not possible, but in any case, the trend is from casual games to gambling.

Similarly, many gambling companies are looking to develop new products that incorporate more and more social and casual gaming elements. For example, to survive the result of einstant games in the lottery product range, activities have been added to make the gaming experience entertaining. The gambling companies also have features that allow players to share their gambling experiences with their friends. It can be said that gambling companies are trying to approach the traditional plot of entertainment gaming companies. Both social gaming companies and gambling operators are looking for solutions to combine the best features of social games and gambling products. Competition is intensifying and expanding into new areas.

Lotteries may have even greater difficulty implementing entertainment elements in their games than casinos for example. This is especially true for traditional lottery games, where the low payback percentage and slow game rhythm make it difficult to entertain the games.

Adding social and entertainment elements to gambling improves the customer experience, which in turn improves business results. However, improving business results does not automatically mean an increase in problem gambling. Increasing customer understanding and thereby improving the customer experience also helps prevent gambling problems. It’s worth remembering that gambling is an entertaining and fun activity for about 90-95% of customers. However, we also need to take better care of the 5-10% group, for whom the situation is something completely different.