The online lottery revolution: US states move online, affiliates look for sustainable model

Online lotteries are set to grow in the US this year as more states consider launching digital products and secondary lotteries continue to grow in popularity. Martyn Hannah looks at some of the challenges and opportunities faced by operators such as Michigan Lottery as well as affiliates.

The Michigan Lottery has been a surprise success story in US igaming. Since launching online ticket sales in August 2014, the operator has added a suite of instant win games that have helped drive full year 2016 gross gaming revenues to US$395m.

To put that into perspective, the 20 igaming sites live in New Jersey generated US$197m over the same period, according to figures released by the state’s Division of Gaming Enforcement.

The lottery has done this by acknowledging the need for digital games to remain competitive among an ever-increasing number of entertainment options, and delivering the right content through the right channels, particularly on mobile.

Michigan’s success should spur others into action, but fears over cannibalisation of retail sales continue to linger.

This is hindered further by legal and regulatory constraints in some states – the Minnesota Lottery launched a portfolio of online instants, only for lawmakers to issue a legal challenge, forcing the lottery to pull down the shutters just months later.

But so long as player appetite for online lottery content continues to go unsatisfied by state-run lotteries – just nine including Michigan, New York, Kentucky and Illinois currently offer digital products – other operators will look to fill the void.

This has led to the rise of secondary and synthetic lotteries, which allow players to take part in draws in states across the US, as well as in other countries – but these straddle a fine legal line. 

Before discussing the role these lotteries are playing in the wider industry, it’s worth looking more closely at the Michigan Lottery, and why its online proposition has been such a success.

Michigan “developing omni-channel players”
Jeff Holyfield, spokesman for the Michigan Lottery, says the operator launched its online offering to provide customers with more ways to play across all channels. “Today, more consumers want to do business online, and that includes lottery players,” he says. 

“Our online games add more options, and create new opportunities for sales and long-term growth. Our focus is on developing omni-channel players who will play at home, in the stores, and on their mobile devices; wherever it is convenient for them at any given time.”

The Michigan Lottery offers four traditional draw games, four instant draws, 37 scratch games and 41 instants, with the last accounting for more than 90% of total online revenue.

Its digital products are offered on desktop, mobile and tablet devices, with the lottery positioning itself very much as a “mobile-first” operator, with more than 50% of play coming through the channel. Over the coming 12 months, that is expected to rise to 60%.

“We focus on optimising games for use on smartphones, tablets and other mobile devices, then adapt them for laptops and personal computers,” says Holyfield. “The use of mobile is much higher than expected, so we have shifted our development to a mobile-first approach.”

This has helped tap into a new, younger player demographic that previously had not engaged with the lottery. More than a third of its online players now fall into the 18-35 age group, which is under-represented when it comes to traditional retail games, where the age category accounts for just 16% of play.

The ability to attract new, younger players via online is a major boon, but the vital question other lotteries will be asking is whether launching digital lottery products comes at the cost of retail sales.

Holyfield says that is not the case: “By having players used to thinking about the lottery wherever they are the retailers benefit, despite the misconception of some that retail sales will plummet if a lottery offers online sales. We have had back to back years of record instant games sales and record total commission for retailers since launching our digital games.”

This is partly because traditional draw players have embraced instant win games for the first time, engaging with the lottery on a more regular basis. But it is also due to intelligent marketing, and cross-selling retail players online and vice versa.

Back in April, the lottery launched a new family of instant games, the ’Hit’ family. Players who bought a Hit family instant game ticket received 10 free online games if they became new online players. When players deposited US$10 into their account they received a US$10 instant game coupon redeemable at any lottery retailer.

“This sort of cross-sell promotion is helping to create omni-channel players and we expect that to raise overall awareness of the Michigan Lottery and to support an incremental increase in sales across all channels,” Holyfield adds.

Lottery affiliates – looking for sustainability
As more states launch online lottery products, the opportunity for affiliates to get in on the action increases significantly, too. There are plenty of lottery affiliates already established, providing draw results and links to sites and secondary lotteries for more than a decade.

But a lot of these affiliates have struggled to build a sustainable business, and Adam Barber, co-founder of Lotto Logic, which operates Lotteryusa.com, says this is due to player lifetime value being stretched over a much longer period than sports and casino.

“In most jurisdictions lottery is the first or second biggest vertical, but as an affiliate you’ll need good volume to make the equivalent amount of money you would in sports or casino. This is because while average player value may be more or equal to casino and sportsbook, it’s spread over a longer player lifetime.

“The internet is littered with abandoned affiliate lottery sites that are well designed and feature-packed, but didn’t attract enough players to make the grade,” he adds. 

Barber says his site is the largest lottery affiliate in the US with up to seven million monthly users, and nearly three quarters of those fall into the 18-34 age category. Its readers have a high propensity for mobile, with 78% accessing the site via smartphone and tablet devices.

Barber says this perfect storm offers huge potential for online lottery operators and affiliates to work more closely together.

“The potential to attract a new younger ‘online’ demographic with exciting new lottery style and instant games is one that can’t be missed. Couple this with the fact that some state lotteries appear to be acknowledging the benefits of affiliates makes it even more refreshing.” 

This has not been lost on the Michigan Lottery, which plans to launch an official affiliate programme later this year. But in the meantime, some affiliates are boosting their revenues by porting players to secondary and synthetic lotteries.

These fall into two categories:

• Bet on lotteries – allow players to bet on the outcome of official lottery draws through a third-party operator. The bet is placed with the operator, and the jackpot – usually the same as the official lottery draw – is insured,
• Messenger lotteries – a lottery agent in the state/market where the official draw is taking place purchases a ticket on behalf of the player, scans the entry, and uploads it to an online account.

The former is illegal in the US, but the latter is fast turning into a bona fide way for online lottery operators to offer products over the internet to players across the country and internationally.

The North American Association of State and Provincial Lotteries (NASPL) believes secondary and synthetic lotteries will become a significant vertical in the same way other emerging igaming products have.

“Sports betting, fantasy sports and esports have all made their way into the mainstream, so they [synthetic lotteries] probably will have a place in the market as well,” says David Gale, executive director of NASPL.

2017 looks set to be the year of the lottery in US igaming, with Michigan and the other eight states already live enjoying a huge first-mover advantage.

More states will undoubtedly enter the fray over the coming months – Massachusetts is considering expanding into the online lottery sector, while New Jersey recently passed a bill permitting lottery couriers that could open the door to third-party online ticket sales.

New states embracing digital lottery products will provide a major boost to the sector, while also throwing up huge opportunities for affiliates who have kept their head above the water.

For established operators such as the Michigan Lottery, the next 12 months will see them strengthen their online proposition with new games and services.

It will also be interesting to see how the secondary/synthetic market develops and whether sites will come under increasing legal and regulatory pressure.

But as the saying goes, you have to be in it to win it.