Before North Carolina's lottery starts early next year, a handful of companies will jockey to win one of the state's biggest payouts: a lucrative contract to run the games.
The organization of the state's lottery is still in its early stages, following the General Assembly's approval late last month. But the six major companies that operate lotteries around the globe are already salivating at the prospect of supplying North Carolina with gaming equipment, software and expertise.
North Carolina represents a new field of battle in the fierce fight for industry dominance. Forty-two states already have lotteries, which means new markets are usually overseas.
The industry's two heavyweights — Scientific Games Corp. of New York and GTech Corp. of West Greenwich, R.I. —said they're interested in bidding on N.C.'s gambling.
The N.C. contract stands to be one of the state government's largest, worth tens of millions of dollars a year. Advertising contracts, anticipated to be worth a few million dollars a year, are also catching the eye of ad agencies.
Lotteries are a big, growing business in the U.S. Last year, Americans spent $49 billion on lottery tickets — more than on movies and music combined.
Lottery sales have grown 31 percent in the last five years, despite the addition of lotteries in only three small states, according to La Fleur's 2005 World Lottery Almanac, an industry publication.
Scientific Games, which runs South Carolina's lottery, and GTech are known as rough-and-tumble competitors. Scientific Games sells about 70 percent of the country's scratch-off tickets, and GTech sells about 70 percent of the tickets for online games, such as Powerball or Pick 6.
In 2002, GTech sought to subpoena Scientific Games in a dispute over the awarding of South Carolina's lottery contract, but a judge nixed the move. This spring, Scientific Games sued GTech, alleging patent infringement on lottery terminals.
"Those two companies are very competitive and anxious to win the lottery contracts," said Buddy Roogow, director of Maryland's lottery, which uses Scientific Games for its online gaming and a smaller company for scratch-off tickets. "I don't think they're real fond of each other."
Preparing for battle
When the General Assembly was considering the lottery bill, both firms had lobbyists in Raleigh. Each said lobbyists were needed to monitor the legislation. It is unclear how much the companies spent, because state law does not require such disclosure.Each touts its expertise in starting lotteries around the country and the globe. In North Carolina, both say they have the background to build what is basically a $1 billion-plus business from scratch in just a few months.
Before they and other, smaller companies get their chance to bid, however, the governor and legislature must appoint a nine-member lottery commission, which will appoint a day-to-day lottery director. Then, the state will start finding retailers to sell tickets and will send out a request for bids to operate the games.
Typically, states request separate bids for scratch-off and computerized games.
Lottery operators' bids run hundreds of pages, detailing company history, strategies, equipment — and price. Typically, lottery operators receive a flat percentage on the value of tickets sold, in the range of 1-5 percent.
Within a few years, North Carolina should be selling at least $1 billion in tickets. That would mean at least $10 million a year for the lottery operator.
In South Carolina, Scientific Games holds contracts for both scratch-off tickets and online games. The online portion is expected to generate $50 million over six years, while the scratch-off is expected to produce $27 million over three years.
To guard against any monkey business, the newly passed N.C. law requires at least one member of the lottery commission to have law-enforcement experience.
Years ago, the industry was viewed suspiciously as a dirty business. In the past, employees of GTech and Scientific Games have both been accused of kickback and bribery schemes, though both companies said those were isolated incidents.
A 1996 investigation by Fortune magazine revealed that political connections seeped into the awarding of lottery contracts.
"We'd go to dinner with the lottery director and find out that GTech had hired a yacht and taken out the whole ... legislature," W. Hubert Plummer, an executive with a Scientific Games predecessor, told the magazine.
Roogow, the Maryland lottery director, said the industry and those companies are much cleaner than in years past.
"We've seen little to no illegality," he said.
Virginia and Georgia, the two states closest to North Carolina in population, sold $1.3 billion and $2.5 billion in tickets last year.
Request for Bids
After an investigation of bidders' backgrounds, the N.C. lottery commission will award the contract to the "responsible lottery vendor who submits the best proposal that maximizes benefits to the State," the law says. There is no requirement to award the contract to the lowest bidder.
Headquarters: West Greenwich, R.I.2004 revenues: $1.3 billion (87 percent from lotteries).
Contracts: Runs online games in 26 states (including Georgia and Tennessee).
CEO: W. Bruce Turner.
CEO compensation, 2004: $746,000 in salary, plus $2.3 million in restricted stock.
Scandal history: Last year, two executives with GTech's Brazilian subsidiary were accused of offering bribes, triggering an SEC investigation; no charges have been filed. In 1998, co-founder Guy Snowden stepped down after allegations that he tried to bribe billionaire Richard Branson to drop out of competition for England's lottery.
Scientific Games Corp.
Other Lottery Companies
- Creative Games International Inc., based in Plant City, Fla. (subsidiary of Canadian Bank Note Co. Ltd. of Canada).
- Intralot Technologies Inc., based in Athens, Greece.
- Oberthur Gaming Technologies, or OGT, based in Montreal, Canada (subsidiary of Group Francois-Charles Oberthur of France).
- Pollard Banknote Limited, or Pollard, based in Winnipeg, Canada.