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Divide and Conquer: Meet the Lottery Titans

Insider BuzzInsider Buzz: Divide and Conquer: Meet the Lottery Titans

Enveloped in neon lights, murmuring crowds and the tinny melody of computerized games, a convention center showroom here bears the trappings of a Las Vegas casino. But the players, mostly state employees sporting suits and name tags, haven't come to this annual expo to gamble. Instead, they are sampling the wares of one of government's biggest cash cows: lotteries, which rang up about $202 billion in sales last year in the United States and overseas.

Amid sales pitches and glad-handing, there's also no mistaking which two companies dominate the landscape of government-backed gambling. Commanding the showroom's entrance, with a booth mocked up as a convenience store featuring a Mega Bucks ticket dispenser, is the Scientific Games Corporation. Dominating the center of the hall, beneath a twirling orange and blue globe, is Gtech Holdings, its vaunted sales team strolling through a labyrinth of gleaming lottery terminals.

"You can pretty much look at the size of the booths as a guide to which companies have the most muscle in the industry," says David Gale, executive director of the North American Association of State and Provincial Lotteries, a sponsor of the event, called World Meet. "As you can see, nobody even comes close to Gtech and Scientific Games."

Over the last three decades, Gtech and Scientific Games have jointly generated several billion dollars in revenue as vendors to lotteries — a business that flourishes at the crossroads of capitalism and public policy. In the process, the companies have steadily — and often controversially — evolved from minor suppliers into an influential oligopoly with a hammerlock on lottery operations.

Every business has its titans, of course. But according to analysts, lottery officials and public documents, Gtech and Scientific Games have done more than just ride the gambling boom — they have strong-armed their way to the top of a publicly sponsored industry that they now dominate. And with the domestic lottery market plateauing, both companies are focused on securing new footholds overseas.

Gtech, in particular, has been heavy-handed at times. According to court papers and regulatory filings, the company's representatives have drawn persistent allegations of bribing their way into contracts. Gtech officials acknowledge questionable practices by some employees, but say the problems are a thing of the past.

With lotteries now struggling to resuscitate lagging ticket sales, the rise of Gtech and Scientific Games also illustrates some of the risks inherent when any industry depends heavily on one or two suppliers for products, innovation and vision.

Through buyouts and mergers with rivals, mixed with a heavy dose of political muscle, the companies have neatly divided the lottery market. Gtech is involved with making, selling and operating online lottery systems while Scientific Games specializes in devising and producing instant lottery tickets, or scratch-offs. Although Gtech and Scientific Games overlap in some areas, both companies, according to a review of state contracts, have cemented roles as one-stop shops that offer lotteries a menu of gambling products, marketing, training, telemarketing and other services.

Gtech, for instance, has 26 of the 42 available state contracts to operate the computer systems that run games like Pick 6 and Powerball. Scientific Games has contracts to print scratch-off tickets in 34 of the 42 states. Current contracts have positioned both companies to make at least $5 billion in combined revenue over the next 5 to 10 years.

"The vendors wield a tremendous amount of influence over the lotteries," says Michael Jones, a former director of the Illinois Lottery, who now heads a marketing research firm in Chicago that works with state lotteries. "Not a decision is made that they don't have some say in."

For their parts, officials at Gtech and Scientific Games say that as primary vendors to lotteries, much of their influence derives from their role in helping to build state lotteries from scratch. In turn, the lotteries have become one of the largest, most profitable segments of the entertainment industry.

The companies also contend that their influence is not about political connections but is attributable instead to industry consolidation — a trend that has enabled a relatively small number of highly regulated enterprises to operate efficiently and profitably.

The companies concede that lottery vendors angle fiercely to win contracts. But, says A. Lorne Weil, the chairman and chief executive of Scientific Games, "the activity of heavily lobbying states or foreign countries to enact legislation to bring lotteries into being — that is not at all directed by us." He says, however, that "we have done some of that in the past." The companies concede that lottery vendors angle fiercely to win contracts. But, says A. Lorne Weil, the chairman and chief executive of Scientific Games, "the activity of heavily lobbying states or foreign countries to enact legislation to bring lotteries into being — that is not at all directed by us." He says, however, that "we have done some of that in the past."

W. Bruce Turner, the chief executive of Gtech, puts it another way. "Gtech has played a key role in fostering the success enjoyed by lotteries today," he says. "We have grown to be the world's leading solutions provider to the lottery industry because we focus on creating the greatest value for our customers, which results in higher returns to the good causes they support."

To protect and expand their turf, Gtech and Scientific Games have tightly woven their interests into the nation's political fabric. Through the years, both companies have spent millions of dollars lobbying legislators and bankrolling lottery referendum proposals that have led to the establishment of lotteries. For example, Scientific Games spent about $1 million in 1984 supporting Proposition 37, which authorized the creation of a state lottery in California.

Often, the companies have also helped draft the very language used in lottery legislation. Some rivals complain that Gtech and Scientific Games have leveraged their political ties not only to win lottery bids, but also to ensure that contracts themselves are written in ways that discourage competition.

Thomas Little, chief executive of Intralot USA, a division of Intralot, a Greek gambling company, says his company's recent interest in securing the New Jersey lottery contract was undermined because the state required that bidders already have several existing United States contracts. "Whoever wrote the proposal had to know that we could not respond because we only had one state at the time," says Mr. Little, who once worked for Scientific Games.

Gtech, Scientific Games and New Jersey officials all say that the state alone crafted the language in the proposal. But jockeying for New Jersey lottery contracts has even pitted Gtech and Scientific Games against each other. Scientific Games recently protested Gtech's winning bid to run the lottery there after state officials learned that Gtech used the same lobbying and public relations firm as the lottery itself.

Scientific Games said the arrangement explained why Gtech was awarded the contract. Gtech officials have denied any conflict of interest, contending that they won the New Jersey contract based on merit, despite the fact that the state would have to pay Gtech $31.7 million more than Scientific Games for its services.

A New Jersey official testified last year during a special hearing about the contract that the MWW Group, the lobbying and public relations firm shared by Gtech and the New Jersey lottery, may have discussed strategies with Gtech that helped it secure the lottery contract.

The state is about to rebid the contract to stem criticisms about an appearance of a conflict of interest. MWW officials say their work for Gtech was separate from their work for the state and did not compromise the bidding process. Even so, some New Jersey officials remain concerned about the process.

"There was the perception that the bid was not conducted with the highest degree of propriety," says Thomas Vincz, a spokesman for the New Jersey Department of the Treasury.

State Senator Ellen Karcher, a Democrat from Monmouth, views the dispute as emblematic of how private enterprise tries to exploit relationships with government officials to commandeer the procurement process — causing taxpayers to foot overly expensive bills to run the lotteries.

"This is a clear picture of how insiders are able to craft laws and bids in ways to help other insiders," she says. "In the end, the taxpayers lose, the players lose, and ultimately the kids whose education is supposed to be funded by these lotteries lose."

Last year, Gtech and Scientific Games took in nearly $2 billion in combined revenue. By devising games, printing tickets, training retailers and processing winning tickets, the companies receive up to a nickel for every lottery dollar wagered in the United States. (Americans spent about $60 billion on lottery tickets last year, including sales at video lottery terminals.)

Historically an underground operation run by mobsters and known as "the numbers," the informal street game has been transformed into a lucrative, state-sponsored corporate enterprise — largely through the efforts of Gtech and Scientific Games, analysts say.

Scientific Games was founded in 1973, and Gtech opened its doors eight years later, at a time when state lotteries were still in their infancy. Only 13 states had lotteries, which were generally operated as small back-office operations and run by political appointees who usually had experience in law enforcement.

Gtech was guided by one of the company's three co-founders, Guy Snowden, a blustery former I.B.M. engineer, who had talked the Bass brothers of Texas and the investor Richard Rainwater into bankrolling a business devoted to winning state lottery contracts and operating them for a hefty commission. Mr. Snowden's pitch to state lotteries was simple: Gtech could start up lotteries faster and operate them more efficiently and with a higher level of security than state agencies could. Within a decade, Gtech had won nearly half of the nation's online lottery contracts.

Scientific Games was created through the merger of two companies — Autotote Systems, which started out manufacturing wagering equipment for racetracks, and Scientific Games, which introduced the first secure instant-lottery ticket in 1974. Autotote acquired Scientific Games in 2000, keeping Scientific Games as the name of the merged company. Over the years, Scientific Games has solidified its position in the instant-ticket market through other acquisitions.

By the mid-1990s, Gtech and Scientific Games had combined technological innovation with hard-minded business practices to further dominate the lottery business. The companies' clout was also amassed through political contributions, as well as by hiring former public officials and lobbyists who aggressively advanced their interests in state legislatures, people in the industry say.

According to data from the National Institute on Money in State Politics, a nonprofit organization that tracks political contributions, Gtech and Scientific Games made more than $1.2 million in campaign contributions to state governors, legislators and political parties from 1999 to 2006. Both companies have retained lobbyists in all of the states in which they operate, according to state lobbying records. In California alone, the two companies together paid $1.1 million to lobbyists last year for a range of legislative measures.

Industry analysts say that over the years, both companies have also plowed several million more dollars into political initiatives that helped pass lottery bills. Scientific Games alone helped draft legislation or finance initiatives that led to the creation of lotteries in California, Arizona, North Carolina, South Carolina, Colorado and Oregon, according to published reports and interviews with former legislators and staff members.

"Without Scientific Games' involvement and contributing over $1 million to get the referendum for a lottery on the ballot, I doubt California would even have a lottery," said Tim Hodson, a former legislative staff member and now the executive director of the Center for California Studies at California State University, Sacramento.

Jerry Kopel, a former legislator in Colorado who worked on the bill authorizing lotteries there in the early 1980s, said Scientific Games played an instrumental role in having the lottery passed in his state. "They contributed $90,000 of the $95,000 used by supporters of the push for a change in the state Constitution to allow the lottery," said Mr. Kopel, whose committee evaluated the company before the lottery was introduced.

Scientific Games was then hired to help the state craft the lottery contract and was the only bidder when the contract came on the market, Mr. Kopel said. Officials at Scientific Games declined to comment on the matter, saying that it happened before the merger with Autotote and that the company's managers at the time have since left. Scientific Games is currently the primary vendor for the Colorado lottery.

Critics have often contended that buying influence among state policy makers has long been the modus operandi for Gtech and Scientific Games. Although Gtech itself has never been charged with wrongdoing, employees and consultants have. In 1997, the company's national sales director was convicted in federal court of receiving kickbacks in a scheme used to pay off consultants and lobbyists who helped Gtech secure contracts. Since then, law enforcement authorities have scrutinized lottery vendors more closely.

Officials at Gtech and Scientific Games say that accusations of influence-peddling are relics of their past, stemming from a time when each of them was racing to gain a foothold in the fledgling lottery business or to persuade public officials to start lotteries. These days, with lotteries in most states and almost no other competitors, there is less pressure to gain inside access to state legislators and lottery directors, the companies say.

"Today, the numbers in the industry champion themselves," says Mr. Turner, Gtech's chief executive. "We spend less money in governmental relations than we have in our entire history. It's just not necessary anymore."

Yet Gtech's lottery push overseas is raising many of the same questions about business ethics that have haunted the company in the United States. According to regulatory filings, the Securities and Exchange Commission is investigating accusations by Brazilian government officials in 2004 that two Gtech employees offered bribes to one of the country's lottery officials to win contracts in 1997 and 2000. The accusations led Brazilian authorities to file a civil suit against Gtech, contending that the company illegally obtained the contracts.

A Gtech spokesman says the company's internal investigation found that rather than offering bribes, Gtech's employees were the victims of attempted extortion by Brazilian officials. "We were the target of a very sophisticated extortion scheme launched by high-level individuals as well as the ruling political party," says Bob Vincent, the Gtech spokesman.

The S.E.C. declined to comment on the investigation.

Texas authorities, in a regulatory examination last year of Gtech's business practices, raised concerns about possible bribes and other possible improprieties involving the company's activities in Brazil, Poland, the Czech Republic and Trinidad and Tobago, describing Gtech's "operating style" as "very aggressive." The report cites Mr. Turner of Gtech as acknowledging that in making questionable payments in Brazil, the company's employees may have "flown dangerously close to the sun."

Gtech dismissed the significance of the Texas report. "As scathing as the report is, it didn't affect anything," Mr. Vincent says. Of the problems in Brazil, he says that "even though our compliance system worked, our people probably should have been more circumspect about some of the meetings they had."

Recent questions have surfaced about Scientific Games' practices as well. For example, a former lobbyist in North Carolina, Kevin Geddings, was sentenced to four years in prison this year for hiding a financial relationship he had with Scientific Games in the years before he became a member of the state's lottery commission in 2005.

Court records show that Mr. Geddings, while lobbying for Scientific Games, ran an aggressive campaign to not only start a lottery in North Carolina, but also to ensure that Scientific Games ran it there as well. The company paid Mr. Geddings more than $250,000 for his lobbying work, according to court papers.

Mr. Geddings performed similar work introducing a lottery in South Carolina. According to court records, in 2000, the same year that South Carolina residents voted overwhelmingly for the lottery, Mr. Geddings consulted for a group called the South Carolina Lottery for Better Schools Coalition. It was a nonprofit advocacy group paid by Scientific Games to build public support for a lottery, and Mr. Geddings's public relations firm provided office space for the group. The vendor hired to run the lottery was Scientific Games.

Mr. Weil, the chief executive of Scientific Games, characterizes Mr. Geddings's case as an ethical aberration in a generally stand-up industry. "Every once in a while, unfortunately, you have a situation where somebody who's employed gets a little overzealous," he says. "But I think it is such a minuscule percentage of the people that are involved in the industry and such a minuscule fraction of the total activity going on. It's unfortunate that that's really the only part of it that the public sees."

Earlier this year, Gtech was the host of an industry conference at a plush resort on Amelia Island in Florida, under the banner "Imagine the Future." Luring hundreds of lottery directors from the Americas, Europe, Asia and Africa, Gtech offered a future for lotteries that extends far beyond the ticket counters of American convenience stores. On a stage festooned with flags from around the world, the company dazzled its audience with a battery of interpreters who translated its presentations from English into five other languages.

All of that was in keeping with Gtech's own international aspirations. Last year, Lottomatica, an Italian conglomerate that operates the Italian National Lottery and is among the largest gambling companies in the world, acquired Gtech. With 6,300 employees and a geographic footprint in 60 countries, the merged company now controls 63 percent of the world's online lottery business.

"The future of the lotteries in the U.S. is a question of public policy," says Mr. Turner of Gtech. "The final new frontier for us is in emerging markets such as Southeast Asia, China and Russia." By taking more of Gtech's products abroad, Mr. Turner projects that over the next five years, nearly half of its sales will come from overseas, compared with 35 percent today.

Scientific Games, meanwhile, has made its own international push. The company has spent nearly $200 million over the last three years acquiring companies that have increased its presence overseas. It now has about 5,500 employees and operates in about 60 countries. Currently, about 40 to 45 percent of Scientific Games' revenue comes from overseas, the company's fastest-growing segment.

The global focus of Gtech and Scientific Games is partly a result of slackening demand at home. American consumers, after more than three decades of buying Lotto, Powerball and scratch-off tickets at record levels, are gradually cooling to lotteries, as a result of the aging of lotteries' core customer base, the proliferation of casinos and the emergence of online gambling.

In 2007, despite offering an average of 30 to 40 games in most states, overall sales at lotteries rose just 2 percent from the previous year. Some two dozen states reported declines in tickets sales, compared with the previous year, according to La Fleur's, a lottery market research firm.

Instant tickets, historically the most popular lottery games, have hit a wall as well. Sales have flattened for Keno, generally such a solid revenue generator that critics have derisively labeled this rapid-fire game as "video crack."

Some industry analysts blame a lack of new products that appeal to younger gamblers for the downturn. Today's basic menu of games, they say, tends to be the same as what Gtech and Scientific Games offered two decades ago: scratch-off tickets dressed up with licensing deals with sports teams, board games and television programs.

"You don't have that much innovation as far as games and marketing goes because two companies dominate the field," said William Eadington, a professor of gambling studies at the University of Nevada, Reno. "Lotteries are going to continue to be stagnant unless something drastic is done."

Officials at Gtech and Scientific Games concede that product innovation has come slowly, but contend that this is largely because of the strict regulatory environment in which they operate. For example, both vendors would like to sell their products via the Internet, which is legal in several European countries but prohibited by federal statutes in the United States. They also say that pricing pressure from lottery officials has given them less money to innovate.

Even with some of these problems, few who study gambling expect the influence of lottery vendors to wane.

"Gtech and Scientific Games have been very successful at running the states' lottery games," says Charles Clotfelter, an economics professor at Duke University and an expert on lotteries. "But there should be no ambiguity to their goals; they might exist in the realm of public policy, but their interest is to make money for shareholders."

Scientific Games and GTECH countries of operation.

Related Documents

Federal Indictment of Kevin Geddings, Scientific Games Lobbyist, May 2006 (PDF)

Texas Investigative Report on GTech, July 2006 (PDF)

Sentencing Order for Kevin Geddings, May 2007 (PDF)

New York Times

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2 comments. Last comment 9 years ago by JAP69.
Page 1 of 1
Littleoldlady's avatar - basket
Clarksville
United States
Member #487
July 15, 2002
17638 Posts
Offline
Posted: October 21, 2007, 11:20 am - IP Logged

Both of them are up to their behinds in poo.  They act like they have a bad case of sibling rivalry going on at the expense of their clients.  Who will pay?  Of course, the people will pay.  Yes, they do need MORE NEW STUFF!! I rarely buy scratch-offs anymore.  If they want to get the new generations to buy, they better come up with some online stuff (I mean games you can play on the computer and get paid).

If you know your number is going to hit, have patience and then KILL IT!

You never know when you will get another hit.

    JAP69's avatar - alas
    South Carolina
    United States
    Member #6
    November 4, 2001
    8790 Posts
    Offline
    Posted: October 21, 2007, 1:31 pm - IP Logged

    Both of them are up to their behinds in poo.  They act like they have a bad case of sibling rivalry going on at the expense of their clients.  Who will pay?  Of course, the people will pay.  Yes, they do need MORE NEW STUFF!! I rarely buy scratch-offs anymore.  If they want to get the new generations to buy, they better come up with some online stuff (I mean games you can play on the computer and get paid).

    If they privatize state lotteries like many are considering it very possibly could come to online wagering in the states.

    You can see it coming.

    WHATT