The companies that run state-backed lotteries already have a heavy hand in how the games are operated. But in the years ahead, their control over lotteries is expected to expand significantly while state officials take a step back.

Analysts who track the industry say the largest companies are trying to forge what one calls “enhanced partnerships” with the states and what others refer to as “privatization” programs that will transfer most of the day-to-day management and strategic decision-making from states to private companies.

The lottery industry in the U.S. is dominated by two giants, International Game Technology PLC and Scientific Games Holdings LP, and a handful of smaller companies, including Intralot SA and Pollard Banknote Ltd. These companies are likely to continue to dominate this market, which boasted $82 billion in ticket sales in the 2020 fiscal year because states are reluctant to risk hiring an upstart to run such a high-profile business.

Lottery systems nationwide are evolving into quasi-privatized operations, with state governments assuming an oversight role while private companies reap millions running this sophisticated form of gambling.

These companies provide the software and computer systems that help run games such as Pick 4 in Kentucky and Maryland, Cash Pop in Florida, and Lotto in Colorado. Some companies also print instant scratch-off tickets, process winning tickets and manufacture terminals — including video lottery terminals — used at retail locations.

While these companies play a vital role in all 45 states that operate lotteries, plus Washington, D.C., the industry is transitioning, according to analysts, in a way that will give them nearly total control as private managers of state lotteries.

“The transition that is taking place will let the companies effectively provide more service and manage almost everything ends to end,” said Adam McLaren, a vice president and senior analyst at Moody’s Investors Service in New York.

As lottery jackpots grow, involving multiple states, and as lotteries introduce new products such as sports betting apps, the technology needed to drive these changes and upgrades becomes more complex.

McLaren said states don’t have the capital or expertise to manage these systems, monitor and secure user data, and process winning tickets while designing new games.

So far, only three states — Illinois, Indiana, and New Jersey — have gone so far as to “privatize” their lottery operations. Illinois was the first to do so in 2011 when it hired Northstar Lottery Group LLC, a consortium owned by International Game Technology and Scientific Games. Indiana picked a company a year later that in 2014 bought International Game Technology, and assumed its name. New Jersey struck a deal in 2013 with Northstar.

In these transactions, the private manager generally takes over lottery sales, marketing, and management functions in exchange for an upfront payment and a promise to generate a minimum net income for the state.

These arrangements aren’t always smooth at the start. Illinois canceled its contract with Northstar after a few years because revenue came in lower than expected. It then hired Camelot Group, a company in England that operates the U.K. National Lottery.

Under New Jersey’s 2013 agreement with Northstar, the state received $120 million upfront and a commitment from the company to generate at least $1.42 billion of additional net income over the contract’s life. In a press release issued at the time, the state said the deal would bring in more revenue than expected if lottery operations remained unchanged.

“By combining the Lottery’s and Northstar NJ’s expertise and resources, we will be able to expand the Lottery’s presence in the marketplace, offer exciting new games to our customers and new services to our retailers,” said Carole Hedinger, who was executive director of the New Jersey Lottery at the time. But Northstar couldn’t meet its targets, and the deal was renegotiated in 2019.

In February, the Washington, D.C., lottery lost revenue and had its image tarnished when its sports betting app went offline during the Super Bowl, one of the biggest days of the year for sports betting. The DC Lottery blamed a software glitch at Intralot SA, which signed a five-year contract in 2019 to run sports wagers and other lottery services. In April, the DC Lottery said it received $500,000 in compensation from Intralot for the Super Bowl fiasco.

Even before that, Intralot was having some management turmoil. Christos K. Dimitriadis, who became CEO in March 2020, stepped down eight months later. Dimitriadis was replaced by his predecessor, Sokratis Kokkalis, who founded the company in 1992. Intralot did not return calls seeking comment.

Nevertheless, Intralot has been able to celebrate some successes. In April, the company announced it signed a five-year extension of its contract with Wyoming’s lottery.

Is it really privatization?

There are limits to how much control states can pass along. Federal law generally prohibits private companies from operating lotteries, fearing their presence could lead to corruption.

In 2008, the Department of Justice issued an advisory noting that states can hire private companies to operate certain aspects of lotteries. Still, the advisory also said federal law requires that states maintain control over “all significant business decisions” and that the private companies may not receive more than a “de minimis” interest in the profits.

The advisory means that states, not private companies, must make major decisions, such as whether to join multistate games, allow online sales or create sports betting app.

“What the ‘de minimis share of profits/losses’ phrase means is that DOJ effectively signaled that what would be disallowed would be a long-term lease where you’d fully monetize the lottery for some long period,” said Leonard Gilroy, vice president of government reform at the Reason Foundation, a libertarian organization that believes most business functions of government should be privatized.

Gilroy said the DOJ decision means lotteries can’t be fully privatized. “That is not going to happen. Federal law won’t allow it,” he said, adding that what most people call privatization plans are public-private partnerships.

Whether they are called privatization plans or partnerships, analysts agree that more will be crafted in the future.

In a recent report about Scientific Games, Zacks Investment Research Inc. in Chicago said the lottery industry’s transition toward more private management has already begun and is “evident from the increasing involvement of private vendors in state lottery management, higher prize payouts and introduction of tiered pricing for national jackpot games.”

David Gale, executive director of the North American Association of State and Provincial Lotteries, said there is a practical reason why lottery companies will play a larger role. He said they are needed to print out the dizzying array of instant tickets, design and build new terminals, and create the systems to transition lotteries to the internet.

“States can’t do that on their own; they are not manufacturers,” Gale said.

The association represents 53 lottery organizations.

A recession-proof industry

The lottery business is one of the few gaming industry sectors that appears recession-proof.

Early in the pandemic, for example, casinos were hurt badly when they shut down as COVID-19 spread and stay-at-home ordinances were implemented.

But lottery operations weren’t affected as much by the pandemic as overall gaming revenues at some companies grew.

During the first year of the pandemic in 2020, Scientific Games posted total revenue of $2.7 billion, 20% less than the $3.4 billion reported in 2019, according to its 2020 annual report. But revenue from the company’s gaming operations plummeted 47% to $926 million during that period. Meanwhile, revenue from the lottery business increased slightly to $918 million in 2020 from $911 million in 2019.

Its lottery operations also buoyed IGT’s results. IGT reported its 2020 revenue from gaming operations plummeted 45% from the previous year to $953 million, while revenue from the lottery business declined just 5.6% to $2.2 billion. Both segments bounced back in 2021, with lottery revenue increasing 30% to $2.8 billion, while IGT’s nonlottery businesses grew 34% to $1.3 billion.

IGT declined to comment, but in its 2021 annual report, the company said, “The global lottery industry has demonstrated remarkable resilience during the COVID-19 pandemic, and revenue is expected to grow at a mid-single-digit rate. From pre-pandemic levels.”

The lottery business is not only recession-proof but as jackpots grow large due in part to the multistate games, revenues for the companies are also expected to grow. In 2016, when the Powerball jackpot hit $1.6 billion, IGT’s revenue hit $5 billion that year, a record high that it has not yet repeated. The company wouldn’t confirm the impact of the Powerball jackpot on its growth.

But in its 2016 annual report, then-CEO Marco Sala wrote, “It was a very good year for IGT’s global lottery operations, where revenues increased 7% in constant currency. This includes same-store revenue growth of nearly 10% in North America.” Sala also noted that IGT signed new lottery contracts that year in Florida, North Carolina, Virginia, and Wisconsin and extended key contracts in Georgia, Texas, and Michigan.

While the lottery is IGT’s largest business segment and accounted for nearly 70% of its $4.1 billion in revenue in 2021, IGT is also a vendor to casinos and is best known for its most successful product: The “Wheel of Fortune” slot machine, one of the most popular slot machines in the world. It’s also one of the longest-running, celebrating its 25th anniversary in 2021.

Consolidation and lack of competition

While lottery revenues are growing, the number of companies that provide lottery services has declined. That’s partly due to a series of mergers and acquisitions over the past few decades that have consolidated the sector and centered the industry operations in Canada and Europe, even though the U.S. is the largest market for most companies.

The last U.S.-based lottery giant, Scientific Games, sold its lottery business in April to Toronto-based private equity firm Brookfield Business Partners LP for nearly $6 billion. The remaining part of Scientific Games, mainly slot machines and online games or iGames, was renamed Light & Wonder Inc. and is based in Las Vegas. Brookfield retained the Scientific Games name and will operate the unit in suburban Atlanta.

The sale of Scientific Games was largely prompted by the company’s need to reduce its enormous debt load, which resulted from numerous past acquisitions, including the $5.1 billion purchase of slot machine maker Bally Technologies Inc. in 2014. The company “realized that they needed to do something to de-lever,” McLaren said.

The change in Scientific Games’ direction also reflects the change in ownership. For years, the company was controlled by New York billionaire and investor Ron Perelman through his holding company, MacAndrews & Forbes Inc., which held a large stake in Scientific Games. Perelman sold his shares and stepped down as chairman in 2020, prompting the board to undertake an 18-month strategic review, leading to the sale.

That transaction leaves two Canadian firms, Brookfield and Pollard; two British companies, IGT and Camelot; and one Greek firm, Intralot, at the forefront of the industry.

“Years ago, there were three times as many lottery companies. Through attrition, buyouts, and mergers, the number of companies has been reduced,” Gale said. “There aren’t any new companies.”

Charles Clotfelter, professor of public policy and economics and law at Duke University who has written about lottery companies, said states are reluctant to try new companies for fear that something could go wrong.

“States don’t want to get in a situation where they go to a new vendor, and then something blows up,” Clotfelter said. “States tend to use the same vendors.”

Not only do those practices make it difficult for new companies to break in, Clotfelter said, but it gives the largest companies more influence over how lotteries operate.

In the 1970s, “when these lottery bills were passed, the halls were filled with lobbyists for companies. But not as much anymore,” he said.

The newcomers

Although the industry is dominated by IGT and Scientific Games, two smaller companies, Intralot and Pollard Banknote, are quickly developing pythonic power in the lottery industry.

Of the newcomers, Pollard — best known for printing instant-win tickets —– perhaps has had the oddest entree into the business. The company was founded in 1907 in Winnipeg, Manitoba, as a small family-owned commercial printing business, known then as Saults & Pollard.

As sales expanded, it ventured into security printing in the 1970s and eventually landed a contract with the Bank of Canada to print stamps, stocks, bonds, and government documents. The company’s name was changed to Pollard Banknote to commemorate its new business. But the move proved futile as the Bank of Canada decided to eliminate paper $1 bills and replace them with the “loonie” coin.

The company then won the contract to print lotteries for the Canadian government. In a 2016 interview with Financial Post, Doug and John Pollard, brothers who are co-CEOs of the company, said the old name stuck. “‘We’ve been known as Pollard Banknote for 30-odd years, and we’ve never printed a banknote in our lives.’ And, John adds, ‘have no plans to.’”

Professor Constance Mitchell Ford of the University of Maryland contributed to this report.

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