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Secondary lottery providers step up the competition against monopolies

| By iGB Editorial Team
The recent spat between Camelot and Lottoland showed the dominance of national lottery operators is under threat. iGaming Business talks to Zeal Investments about its potential and its views on investing in early stage igaming ventures.

The recent war of words between Camelot and Lottoland showed just how much of a threat the secondary lottery market poses to national lottery operators. iGaming Business talks to Zeal Investments space about why it sees so much potential in the vertical and its views on investing in early stage igaming ventures

By Joanne Christie

In late September this year iGaming Business found itself in the middle of a battle between old and new lottery models after UK national lottery operator Camelot announced it would be raising EuroMillions ticket prices from £2 to £2.50.

Fast-growing secondary lottery market operator Lottoland, however, announced that it would keep ticket prices at £2, prompting criticism from Camelot that included claims it was not “subject to the same rigorous regulations that we adhere to”.

The following day Lottoland, which is licensed and regulated in Gibraltar, the UK and the Northern Territory in Australia, issued a scathing rebuke to its competitor, in which it stated:  “It is unfortunate that they clearly feel so threatened by Lottoland’s growth in the UK, that they have resorted to these underhand tactics.”

Monopoly positions under threat
The spat brought the vertical into the spotlight for the first time for many, but others, such as Zeal Network, have been seeing the potential for alternatives to national lottery monopolies for some time.

London-based Zeal, which began life as German secondary lottery provider Tipp24 back in 1999, has recently set up an investment arm, Zeal Investments, to make sure it has a “seat at the table” when it comes to future disruptions in the lottery space, according to its director James Oakes.

Oakes, who founded Geonomics in 2008 and was its managing director until the company was bought by Zeal Networks earlier this year, says the company views lotteries as a key growth area.

“The secondary lottery market I believe is here to stay and is growing. You can see how much it is growing by the speed at which Lottoland is growing and when you look at the number of the new entrants pouring in.

“Of course as it is getting bigger that does mean it is rubbing up against some of the state lotteries and our company’s view on that is that competition is good in these sort of situations and it should be regulated in the same way that any of the other betting products are regulated. Regulate it, tax it but then let people compete.”

Oakes says Zeal is close to signing its first investment, and hopes to make four to five investments over the next year. “Ultimately we’d like to get to a portfolio of about 20 investments, ranging in size from about £200K up to £1 or £2 million.”

Zeal’s business model is different to many other investors in the igaming space, Oakes says, as its approach is not M&A based but rather it seeks to get in on new ventures at the very early stage.

“What we are doing is we are investing and taking minority stakes because we want to invest in early stage businesses and we don’t want to swallow them up too quickly and close them down,” he says. “We want to help them but also let the entrepreneurs grow those businesses. In some cases we might want to acquire them down the road; in other cases it might just be a financial return.

“Ultimately of course if these businesses are successful then we’d love to acquire them but if you try and go for that right at the beginning then you kind of swallow it if you shut off all the entrepreneurial juice. When you are making early stage investments, as we are, you really are investing in the entrepreneur and the team, not so much the product or technology at that point.”

Unfortunately for investors in the igaming space, Oakes say there is a lack of the type of start-up infrastructure that exists in other industries, such as fintech or medtech.

Mature start up ecosystems
“When you look at other industries that aren’t gaming or lottery, they have very evolved start-up ecosystems, for example, there is a whole fintech start-up scene — there are accelerators, fintech for angels, fintech this and fintech that. That doesn’t exist in gaming or lottery in the same way, which makes our job harder.”

One reason for this, Oakes believes, is a dearth of willing investors. “On the funding side of the table a lot of venture capitalists will have a block on being able to invest in gaming and that’s very common — it’s more common in the [United] States but it’s also common here that a lot of funding that is available in other sectors isn’t available in this sector.”

Another issue is the secrecy that proliferates in the gaming sector. “One of the things that I’ve definitely noticed in the gaming space is that entrepreneurs are way more secretive than in other areas, which is really interesting.

“The amount of times that we come across one or two guys who have been boiling their brains in their bedrooms for the past two years and not ever spoken to the outside world is unbelievable. When you look at other sectors, start-ups are out there shouting about what they are doing from the beginning so there is definitely a different mindset.”

Both these factors are limiting innovation in igaming, but Zeal is looking at ways to change this and has recently formed a partnership with the London arm of the MassChallenge accelerator programme. “There is no mature ecosystem for start-ups in gaming. We are trying to start it ourselves by doing partnerships and educating the world that there is a path for start-ups and a willing investor there are well.”

Zeal’s main focus in terms of investment is the somewhat niche area of disruptive new lottery business models, although Oakes says within that their scope is wide-ranging. “We define lottery relatively broadly, if you think about prize gaming any game that involves a prize and has mass appeal to us is lottery.”

Zeal also has a second, broader, mission to look for companies innovating in related services. “The second bucket is much broader in that we look at start-ups that have a product or a service that we can apply to our core businesses.

“It could be a marketing company that has invented a new technology for acquisition marketing or it could be someone who is doing something clever with artificial intelligence and CRM. It could be a payments company, so not necessarily operators themselves but service providers.”

Oakes says Zeal Investments' first investment is in a “fundamentally new kind of lottery model which we think could be transformative” to the sector.

If that does indeed prove to be the case, state lotteries that have long enjoyed monopoly status and never had to concern themselves with the type of rivalry companies in other verticals have come up against may soon be forced to do a lot more than issue the odd critical statement to stave off the competition.

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