States up the online ante

Insider Buzz: States up the online ante


The director of the New York State lottery said a few months ago he had cleared hurdles in his quest to sell lottery tickets over the Internet, but now that plan is stalling.

When the U.S. Justice Department in December narrowed its interpretation of the 50-year-old Wire Act, saying it banned only sports betting and not other forms of online gambling, the decision sparked hope in state capitals that lotteries could start selling tickets online and lead a charge into online gambling.

But the convenience-store lobby in New York protested the state’s plan, and now the plan is under review as the governor’s office re-examines state gambling policy. Lottery directors in other states also are sparring with store owners fearful of losing customers who buy tickets.

The battle is one front in a broader struggle among state lotteries, casino operators, Internet companies and convenience stores that could determine how an expected wave of legal online gambling takes shape in the U.S.

State lotteries and their suppliers, lottery-technology companies GTech Corp. and Scientific Games Corp., are at the forefront of a host of would-be online gambling operators. Others looking to join the action include online games maker Zynga Inc. and casino operator Caesars Entertainment Corp. The big casino firms are pushing Congress to pass a bill that would limit states’ online lotteries but let the firms operate online poker sites.

The lotteries’ first test is in Illinois, where lottery director Michael Jones last month beat back opposition from convenience-store owners to begin the first online lottery sales for individual drawings in the U.S. Lotteries across the country are watching Illinois to guide their own online plans.

Other state lotteries hope to push the envelope further into areas — such as instant tickets, slot-machine games and blackjack — that could invite more controversy. In Delaware, the lottery has developed a plan, which it hopes legislators will introduce in a bill in the next couple of weeks, allowing the lottery to offer online blackjack and slot-machines games, in addition to ticket sales.

Lottery directors say they have long felt pressure to find new sources of revenue since lotteries in most states have matured and are no longer an area of growth. Moreover, many recession-hit states are in desperate need of money.

“If you stand still, you’ll lose ground in this fast-paced industry,” said Vernon Kirk, director of Delaware’s lottery. “The world is going to be in cyberspace. You need to get out there.”

Lotteries began discussing forms of online gambling as far back as 1990, when Minnesota briefly considered allowing people to play the lottery through Nintendo game machines connected to telephone lines.

One longtime obstacle to the lotteries’ online hopes was the Justice Department’s interpretation of the 1961 Wire Act, which bans sports betting over communication wires. Justice interpreted the law as also barring most forms of Internet gambling.

Many lottery-industry insiders argued the law shouldn’t apply to gambling within state borders, and a handful of states began experimenting with limited lottery-ticket sales over the Internet.

In Illinois, the legislature in 2009 passed a law directing the lottery to start experimenting with online sales. The law asked the lottery to seek U.S. approval. The provision was included in a capital-projects bill promoted by the governor to create much-needed jobs.

Lotteries in other states began to request that technology providers bidding on lottery-systems contracts include proposals for Internet sales and other online gambling in case the lotteries decided to expand online. That could provide a boon for companies like GTech, which already provides technology to lotteries that take in 67% U.S. lottery sales.

GTech, a unit of Italy’s Lottomatica Group SpA, included Internet wagering in bids it submitted in 2010 and 2011 for lottery contracts in New York, Virginia, Maryland and Illinois, the company said.

When the Justice Department gave Illinois the green light in December, many state lotteries had a built-in head start over many start-ups and casinos. Apart from new online-poker regulations in Nevada, states don’t authorize private companies to operate most forms of online gambling. But 19 state lotteries now can probably sell tickets over the Internet under existing laws, and in nine states, lotteries might be able to offer full casino games, according to an analysis by GTech.

Gordon Medenica, director of New York’s lottery, said in December the state would start to sell tickets online this year. “We’ve built the system and had it on a shelf waiting for more legal certainty,” he said.

But lottery sales are important to gas stations, liquor stores and other convenience outlets due to the foot traffic they bring, according to the National Association of Convenience Stores. Lottery customers spend $10.35 in an average purchase, compared with $6.29 for a non-lottery customer, according to the National Association of Convenience Stores.

“We’re very uncomfortable with the idea of our customers being able to access lottery games online,” said Jim Calvin, president of the New York Association of Convenience Stores. Mr. Calvin said he got assurances from the New York governor’s office that the plan wouldn’t move forward without further study.

“The retailers are very important to us,” Mr. Medenica said in an interview. “We need to make sure that if we move forward it will not hurt their business.”

Conflicts have also taken place in Maryland and Washington, D.C.

In Maryland, convenience-store owners protested this year when the governor included $2 million in his budget proposal that he expected the state to reap from online lottery sales. After conflict erupted in the legislature, the lottery successfully beat back an attempt by the state Senate to prevent the plan from going into effect. Now the lottery hopes to be running online by January, said Stephen Martino, the lottery’s director, and is considering selling all of its lottery product online. Beyond traditional numbers drawings, that includes instant ticket sales and Keno.

In Washington, lottery director Buddy Roogow in 2010 had crafted a plan he thought might avoid such headaches: creating a full slate of casino games — including poker, blackjack, slot-machine-like games and a game that resembled the board game Battleship — to avoid competing with retailers selling traditional lottery products.

The city council voted to authorize the plan, but last year residents complained at a series of community meetings that the plan was tainted by special favors and lacked transparency and proper oversight. In February, the city council reversed itself, quashing the project.

“We all have to deal with the politics of it,” Mr. Roogow said in a recent interview. “Lottery directors aren’t independent animals who can move on their own.”

Now the focus is on Illinois, which so far has kept its online push alive.Earlier this year, Mr. Jones met with convenience-store owners in his state. “We thought, ‘Dangit, this is just going to kill our foot traffic,’ ” said Kyle Vaubel, who owns 10 gasoline stations.

Mr. Jones told Mr. Vaubel and others that studies of online lotteries in Finland and other countries showed retailers’ sales actually rose. One Illinois lottery survey indicated that the number of retail players in the state would expand to 5.7 million people from 5.25 million people, while revenues at retail outlets would expand to $282 million from $275 million, the lottery said. Store owners say they didn’t buy it.

“Our franchisees aren’t willing to risk their business,” said Keith Jones, director of government relations for 7-Eleven Inc., the biggest lottery-ticket seller in the U.S., and a unit of Japan’s Seven-Eleven Japan Co.

7-Eleven and other convenience-store owners lobbied the Illinois legislature, which was considering a bill to expand online sales to the multistate Powerball numbers draw. All sides eventually agreed to an amendment to the bill that directs a committee of industry and lottery officials to study the effect of the Internet sales on retailers. They also agreed to consider introducing prepaid cards that could be bought in retail outlets and used on the Internet.

Despite opposition, the lottery began Internet sales in late March, dovetailing with a $656 million Mega Millions drawing that attracted thousands of people to test the online system. The first week saw huge sales and didn’t appear to take away from stores. Around 116,000 people bet $1.1 million online, against an overall take of $32 million.

Lottery directors in other states, including North Carolina and New Hampshire, say they are closely watching the pioneers. “It’s the next phase” for the lottery business, said Charlie McIntyre, director of the New Hampshire lottery. “But I’ve been in this life long enough to know not to jump in the pool when I don’t know the temperature of the water.”