Michigan’s thousands of lottery retailers soon could see a new competitor on their ticket-selling turf: iLottery.
The Snyder administration plans to launch a new Internet lottery system that would allow people in Michigan to play digital versions of games like those currently offered at stores — but with smartphones and computers.
The proposal could change the landscape of Michigan’s 40-year-old lottery and, by state projections, pump at least $118 million in profits into the state School Aid Fund in iLottery’s first four years and deliver an additional $361 million over the following four years.
However, some question whether iLottery would be competition, or complementary, to Michigan’s nearly 11,000 lottery retailers.
Auday Arabo, president and CEO of the West Bloomfield Township-based Midwest Independent Retailers Association, said he has discussed iLottery concerns with Lottery Commissioner M. Scott Bowen and other lottery officials.
“They say you won’t lose your regular player” and that iLottery will attract a “younger, hipper-type demographic,” Arabo said. But he’s not convinced.
“From a retail standpoint … every customer counts,” Arabo said.
He said if retailers lose players, that means not just a loss of commissions from tickets, but more importantly, foot traffic and sales of additional items.
“It’s not just the 6 percent commission when they sell lottery, it’s that customer who might come in and buy a bottle of pop, snack, whatever that might be,” Arabo said.
Bowen declined to be interviewed for this story, but a state request for proposals to develop, implement, provide operational support and maintain a Michigan iLottery system lists an objective of “enhancing existing retail partnerships.”
One aspect mentioned in the RFP is the lottery’s intention to have “affiliate retailers,” described as organizations such as businesses that manage online or mobile websites or applications with established traffic.
The lottery would authorize those businesses to host digital advertising and they might receive commissions when the ads result in ticket sales or player sign-ups.
Affiliate retailers “may include existing lottery retailers that have a digital presence,” the RFP says.
The RFP, issued in January, also references the option for the Lottery to have a program in which lottery-approved retailers would sell pre-paid iLottery game cards. The Lottery in November announced it would do some Internet ticket sales, and iLottery was mentioned in Gov. Rick Snyder’s February budget unveiling.
Linda Gobler, president of the Michigan Grocers Association, said she has told Bowen and other lottery officials that she doesn’t know how her members will view iLottery.
“I do think that the lottery has to keep growing,” Gobler said. But, she said, “it’s also something that benefits my members. It’s something that retailers can sell.”
Gobler said lottery officials believe “it’s a whole different niche” of players that iLottery will attract and their arguments that iLottery will draw younger players who currently don’t purchase tickets at retail locations are persuasive.
However, “my fear is that, like any change, as soon as we put this out, retailers probably are not going to be happy and will feel that it’s a diminution of their clientele. And I don’t want to see that happen,” Gobler said.
She and Arabo said lottery officials have expressed the desire to work with the retail sector and appreciate its concerns.
Based on information in the RFP, the state envisions a system that would allow the purchase of existing lottery games through Internet portals. An RFP addendum specifies that the system must have the technical capability to handle up to 10,000 iLottery sales transactions per minute initially and expand up to 50,000 concurrent players should the lottery desire.
Players could register online and set up “virtual wagering accounts” into which they could transfer funds that would be used to make bets and play games. Winnings could also be deposited into the accounts, according to the RFP.
The system would need to be able to verify a player’s age, identity and physical location, with the goal of only allowing eligible Michigan players who are physically located in the state to play. The RFP also seeks Michigan residency verification capability and says that lottery proposes this “as a self-imposed policy that only Michigan residents be allowed to participate in iLottery.”
Illinois, which a year ago became the first state in the country to sell lottery tickets over the Internet, also employed technology like geo-location and age controls and it has worked fairly well, said Lottery Superintendent Michael Jones. Illinois launched online sales of two existing games, Mega Millions and Lotto, last March.
What didn’t go so well at the start was the appeal of the Internet interface to access the system.
Jones said the iLottery “technically … worked fine.” Among other things, however, it required considerable information from would-be players, including Social Security numbers. “And requiring a Social Security number just made you lose a significant number of people who might have played,” he said.
Jones said the interface was redesigned and relaunched in November when the lottery added Powerball to its Internet lineup, and that game is much more consumer-friendly.
Jones’ advice to Michigan: “Make sure that their interface or portal mirrors exactly how people purchase goods over the Internet now. Make it just as easy, make it just as intuitive, make it just as graphically pleasing.”
He said the lottery has 60,000 registrants in the online system, in a state of 14 million people. Consumer interest in online games grows with prize amounts, research for the lottery found. The ability to play Mega Millions online when prizes are $100 million or more would draw 600,000 to 1 million people who don’t normally play the lottery, and Jones said he does not doubt that’s achievable.
He said attracting players back to online games posed a marketing challenge and the state has a new campaign it will launch the next time a prize is large enough. Part of the message “will be that you can play either with regular retailers or over the Internet,” Jones said.
The Illinois Retail Merchants Association has commissioned an economic impact study to determine, among other things, how Illinois’ brick-and-mortar lottery retailers have been affected by online sales.
As in Michigan, the loss of walk-in traffic has been a concern.
“Of course, you want to sell lottery tickets if you’re a lottery dealer, but it’s the auxiliary sales that are made that help pay the bills, help pay the salaries, help pay the property taxes,” said association President and CEO David Vite.
He said the study should be complete around the end of March.
The Michigan Bureau of State Lottery‘s RFP calls for iLottery proposals to be submitted by March 26. As the RFP moves forward, legal questions are being raised.
Lance Boldrey, member in the Lansing office of Dykema Gossett PLLC, said one question is whether iLottery conflicts with Michigan’s 2004 constitutional amendment. That amendment limited the expansion of gaming — including any new state lottery games that use player-operated mechanical or electronic devices — without a statewide vote and local votes.
Boldrey also said state lottery law limits retailers to sales that occur at their place of license, raising the issue of whether Internet sales are authorized. Another question is whether the iLottery might violate the exclusivity of Native American gaming under state-tribal compacts and nullify tribes’ requirements to share revenue, he said.
“We’re actively evaluating whether, and under what conditions, the state could authorize this product,” he said. “We assume that lottery believes that their current authorization under the lottery act is sufficient, to issue the RFP … and offer these games for play. Our initial analysis: We disagree with that interpretation on a number of levels.”
He said Dykema is examining the legal issues in response to questions brought to the firm by existing lottery vendors and tribes engaged in gaming. As of last week, Dykema had not been retained to represent any interest in relation to iLottery.
In an RFP addendum, the lottery said it had obtained guidance from the state attorney general’s office in regard to the voter approval language in the 2004 amendment, and that “neither a new law nor lottery game is being proposed, thus the voter approval requirement does not trigger.”
