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Lottery Games

One helpful way of defining the term strategy is to use its Greek origins as the "art of the general." While the militaristic connotations of this definition frighten many individuals, it does provide a very useful analogy for those who operate any organization, particularly a lottery. A general cannot make a strategy for defending or attacking unless he or she is ready to cover all the flanks. Similarly, a lottery director is faced with many issues that can expose the director to attacks from many sides. A lottery commissioner has to be able to satisfy a variety of governmental interests such as the legislature and the executive branch as well as a host of interested social groups who oppose gambling ranging from church groups to Gamblers Anonymous. But besides taking into account the interests of various constituencies, a lottery commissioner must carefully determine the type of business he or she is engaged in. Just who are the competitors for the dollars that bettors spend on the lottery? Most commentators on lotteries as well as the lottery commissioners themselves agree that the lottery is a form of entertainment. Like all other forms of entertainment, it provides its users with an outlet for escape or a way to fulfill a dream. Since different bettors have different dreams, a lottery needs to provide different outlets for different dreams. Variety is the spice of life, and this truism is especially applicable to businesses that are trying to provide for those who have a need to change their lives. Because a lottery is a form of entertainment and escape, in formulating and implementing a strategic plan for a state lottery, a lottery commissioner needs to develop a variety of games for his or her customers. Hence, the vast majority of lotteries have "diversified" into all three games (daily numbers, instant games, lotto). Out of the thirty-eight states that sponsor lotteries, only three do not sponsor all three games. The only game that these three states do not offer is the daily number, while all of the states offer a lotto game and instant games. As part of state-sponsored gambling activity, states are also introducing casino gambling and video games (mostly poker games).But even though all lotteries have used an overall diversification strategy, it is striking to observe how certain games predominate the operations of most lotteries. If one examines Table 4.1, it becomes readily apparent that most lotteries are actually using a "niche" strategy, that is, focusing on one type of lottery game while operating the other types of games.Why has this niche strategy for operating a lottery become so common? It has a great deal to do with the primary reason why a state sanctions a lottery; that is, the primary goal of a lottery is to be a consistent source of revenue for state government, thereby making the lottery a tolerable enterprise. A successful lottery is one that is consistent in two ways: 1. It is able to provide additional revenue for states when legislatures and governors are in search of additional revenue sources in order to bal-ance a state's budget. In the foreseeable future, state governments will be faced with an ever-increasing need to supplement their revenue needs with different sources of revenue rather than raising traditional sources of revenue such as sales, income, and property taxes. One measure of a successful lottery will be its ability to provide a state additional revenue in time of need; hence, the game must be able to provide additional revenues when they are needed. To ascertain whether a game is capable of future growth, we will need to establish where a game is on its product life cycle and whether this cycle can be "renewed."
2. A second criterion for a consistent lottery game involves the concept of "cannibalizing" existing games. While the sales of a new game might increase rapidly, if it merely "steals" customers from existing games, then it provides no new lottery revenue. A more positive way of looking at this issue is to ask the question: Upon which game can a lottery commissioner build future lottery games or institute different forms of gambling without affecting existing lottery sales? This criterion will be examined in Chapter 5.

Hence, in evaluating the strategy that a state employs for operating its lottery, two criteria need to be employed. A lottery can be judged to be successful (1) if it is one that is capable of providing growth in sales and (2) if it can introduce new games or other forms of gambling without cannibalizing the sales of existing lottery games. This chapter will examine the first of these criteria-that is, Is there a lottery strategy capable of sustained long-term growth? This growth criterion will be studied in three parts. In the first part, the various strategic options for operating a lottery will be classified. Then the concept of a product life cycle will be applied to the various lottery games. Finally, an evaluation of existing strategies will be made and the future prospects for these strategies will be examined.

CLASSIFYING LOTTERY STRATEGIES
It has already been pointed out that lottery commissioners seem to be employing a niche strategy in operating their lotteries. In order to identify and evaluate these niche strategies, an analogy will be used to classify these niches that corresponds with the strategies that the general manager of a professional baseball team must develop in order to build a consistently successful team. The reason why general managers develop different strategies in building their teams is to take advantage of the type of ballpark in which a team plays its home games. General managers are simply building their teams to correspond to their environments, and the same is true in establishing a strategy for operating a lottery: Develop the game that takes advantage of the demographics of the state.

Strategy 1: Instant Games--Playing for a Series of One-Run Innings
Some general managers need to build a team that allows them to take advantage of a ballpark that rewards speed and hence doesn't reward a team trying to play for a big inning. Since home runs will be hard to hit, the offense must be built around the notion of playing for many one-run innings. To get these one-run innings, the general manager must provide the team with the ability to get a lot of "single hitters" and then have a speedy team that can take advantage of the abundance of runners who can score runs. Lotteries that focus on instant games for the bulk of their revenue are using the "big ballpark" strategy (see Table 4.2 ). The lottery commissioner must provide a continual stream of instant games. He or she also must move quickly to market different games for different seasons as well as appeal to different customers. While no one instant game will be the source of an enormous amount of revenue, if enough successful ones are continually introduced, the strategy can be termed a success.

Table 4.2 presents the breakdown of lottery proceeds from those states that have used instant games as the primary focus of their lottery efforts. The table shows the per capita spent per week ( 1992 figures) on each game, and the figure in parentheses shows the percentage of sales of the total lottery proceeds.

Strategy 2: Lotto Games--Playing for the "Big Inning"
In emphasizing the lotto game as the source of strategic focus, a lottery commissioner is emulating the general manager of a baseball team whose offensive strategy is to play for the big inning-that is, have a few single hitters who are on base when the home run hitters come to bat. It is basically a sit-back-in-your-seat strategy insofar as the team is dependent on the home run hitters to connect every once in a while so that sufficient offense is produced. Lotto games operate in a very similar fashion. Successful lotto games have to be able to generate very large jackpots in order to generate interest in the game. In other words, the home run for a lotto game is its ability to generate a huge jackpot. It doesn't happen every week, but hopefully it occurs often enough so that it keeps the players' interest alive and attracts other players, resulting in even larger jackpots.

Table 4.3 presents the breakdown of lottery proceeds from those states that have used lotto games as the primary focus of their lottery efforts. The table shows the per capita spent per week ( 1992 figures) on each game, and the figure in parentheses shows the percentage of sales of the total lottery proceeds.

Strategy 3: The Dally Number Game--Good Pitching, Good Defense
The final way in which a general manager can build his or her baseball team is to use the strategy that the best offense is a good defense. What this strategy requires is that the team have very solid pitching that is backed up by good defense. It takes no unnecessary risks and in essence is waiting for the opponent to make a mistake. While it does not produce the most exciting brand of baseball, it does allow the manager to control the nature of how most games are played. It is certainly the most conservative of the strategies that have been described, but it ought to provide the most consistent results.

Table 4.4 presents the breakdown of lottery proceeds from those states that have used the daily number as the primary focus of their lottery efforts. The table shows the per capita spent per week ( 1993 figures) on each game, and the figure in parentheses shows the percentage of sales of the total lottery proceeds. (Data in this section provided by the Massachusetts Lottery Commission.)

While the data from this section reveal that all of the lotteries have diversified into the three basic types of games (instant, lotto, and daily number games), they also confirm the fact that each lottery is also pursuing a focus strategy involving one of the games. Each game corresponds to a very definite focus strategy that involves a much different view of its environment. The next section will evaluate the impact and results of these strategies. Again, the criteria for evaluating the successes of a lottery are (1) consistency and (2) future growth possibilities. In the next section, the consistency of each of these strategies will be studied.

PRODUCT LIFE CYCLES OF THE VARIOUS TYPES OF LOTTERY GAMES.
The product life cycle is a marketing concept that identifies four discrete stages that mark the evolution of a product such as a lottery (see Figure 4.1 ). These stages are useful in determining the correct marketing mix for a product so that revenues can be maximized at each stage. The evolution of products through the product life cycle is well documented. However, whether or not decline must necessarily follow maturation for all products is uncertain. In other words, it may be that this cycle is in fact more of a "system" for certain products. A cycle implies that there exists a clear ending point to a product's life. A system, on the other hand, implies that a rejuvenation is possible. In a system context, a product could be "repackaged" at maturation and enter into another period of renewal and growth again. Thus, obsolescence would be avoided, and the product life system would begin anew. In this section, we will determine what the life cycle of each lottery is for each game by examining the life cycle for the top two states that are following a niche strategy for that particular game. By doing this, we will also be able to determine whether that game is capable of renewing itself.

Instant Games
As was pointed out in the previous section, the strategy behind successful instant game lottery sales necessarily involves the constant introduction of new instant games on a seasonal basis. The two states that have had instant games as the focus of their lottery are Massachusetts and Ohio. Figures 4.2 and 4.3 show the quarterly results of instant game sales in these states from 1985 to 1992.

The polynomial equation that describes Massachusetts instant game sales is the following:

Y(sales) = 5.973 + 0.272x + 0.006x2

where x = quarterly sales
x = 0, January 1985
p = .001
This equation demonstrates that instant games are certainly on the increase and have not experienced any decline during the period studied.The polynomial regression equation that describes Ohio instant game sales is the following:Y(sales) = 3.42 - 0.03x + 0.002x2where x = quarterly sales
x = 0, January 1985
p = .005

Once again, this equation demonstrates that instant games are certainly on the increase and have not experienced any decline during the period studied. Overall, these results indicate that the instant game strategy is one that can be used to achieve a consistent increase in sales over a long period of time. In fact, Massachusetts has demonstrated that instant game sales can be quite lucrative. It is no coincidence that Massachusetts has the highest per capita lottery in the United States. Hence, it appears that these instant games are still on the growth part of their life cycles. Additionally, it appears that the introduction of new instant games is able to renew sales and interest in this type of lottery game.

Lotto Games
The success of using lotto games as the focal point of a lottery strategy depends upon the frequency of large jackpots, which can stir the public's interest in the games. Obviously, once a series of large jackpots are built up, it is hoped that these bettors will become frequent players of these lotto games. The two most successful states that have used the lotto as the strategic starting point of their lottery operations are Florida and Illinois. Figures 4.4 and 4.5 , respectively, show how these lotto games have fared.

The polynomial regression equation that describes Florida's lotto sales is the following:Y(sales) = 64.4 + 1.37x - 0.0249x2where x = quarterly sales
x = 0, January 1988
p = .005
These results indicate that lotto sales in Florida are on the maturation segment of the product life cycle. Even though Florida has tried to introduce other types of lotto games, these lotto games have not been able to renew interest in the lotto. Hence, the Florida lotto game seems to be on the downward side of the product life cycle.The polynomial regression equation that describes Illinois's lotto sales is the following:Y(sales) = 45.9 + 0.428x - 0.00298x2where x = quarterly sales
x = 0, January 1985
p = .003

Once again, this equation demonstrates that the Illinois lotto game is clearly on the declining segment of the product life cycle. Like Florida, Illinois has attempted to renew interest in lotto games by offering new types of lotto games, but lotto sales in Illinois still continue to decline slowly.

It appears that even those states with the most successful lotto games have not been able to sustain these games over the long run.

Both of the above results reveal that these lotto games are on the decline segment of the product life cycle. It appears that the public loses interest in lotto games in the long run even if large jackpots occur regularly.

Daily Number Games
The daily number game was characterized earlier as the most conservative lottery game. The lottery that uses this game as its main source of revenue is one that values a steady, consistent stream of revenue. The two most successful lotteries that have used this daily number strategy are the District of Columbia (D.C.) and Maryland. Figures 4.6 and 4.7 demonstrate how these lotteries have fared using the daily number as chief source of revenue.

The regression equation that best describes D.C.'s daily number sales is known as the random walk; that is, the best predictor is its average. The mean (average) sales for D.C.'s daily number game is 84.257. In other words, D.C.'s daily number has achieved a steady state. Its product life cycle is nonexistent. On the other hand, D.C.'s daily number is also not experiencing any growth.

The Maryland daily number game, like D.C.'s daily number game, has its regression equation, the random walk; that is, the best predictor is its average. The mean (average) sales for Maryland's daily number game is 47.148. In other words, Maryland's daily number has achieved a steady state, neither growing nor declining.

Overall, the daily number game is remarkably consistent in that its average sales are its best predictor. A daily number game can be counted on to contribute a certain amount of funds, but this amount cannot be increased over the long run. It certainly appears that these two daily number games are on the mature phase of their product life cycles. How long these games will remain on this plateau cannot be determined presently. The other question facing these two lotteries is, Can this daily number be renewed, or is it facing a slow, painful decline? A related question is, Can a state introduce other types of lottery games or different types of gambling using the daily number as the basis for gambling activity?

SUMMARY
The results reveal that instant games are the only type of lottery game capable of sustained growth in the long run. Certainly, Massachusetts, which runs by a wide margin the most successful U.S. lottery, has employed these instant games to their fullest advantage. Why has Massachusetts been so successful in developing these games? One factor has to be the marketing skill of the commission; the demographics (i.e., its diversity) of the Massachusetts population must also be another factor.

There is another interesting aspect to the success of these instant games. Many states that have recently begun lotteries (such as Texas, Minnesota, Iowa, and West Virginia) have used these instant games as their initial offerings. Obviously, they have seen how successful Massachusetts has been in developing these games and have used Massachusetts as the model lottery. It remains to be seen whether the demographics of these states will allow them to emulate Massachusetts's success.

As for the lotto games, even the most successful lotto games ( Florida, Illinois) are subject to the product life cycle effect in the long run--that is, providing rapid growth during their inception, but this growth cannot be maintained and eventually sales of these lotto games decline. It has already been noted that the strategy of using the lotto as the focus of a state's lottery sales is one favored by large states. It is interesting to note that when California recently started its lottery, it opted to use the lotto game as its first game. Obviously, the results from this strategy have been disappointing, with per capita sales of only $1.00.

The daily number game was earlier characterized as the most conservative approach to running a lottery. The preceding results confirmed that the daily number game did provide a lottery commissioner with a steady stream of revenue, but it is a stream of income that cannot be increased over the long run. The most successful daily number game appears to be operated by the District of Columbia, where sales are constant but at a consistently high level. It appears that the demographics of D.C. are well suited to the daily number game, that is, almost exclusive urban population. Meanwhile, states such as New York, New Jersey, and Pennsylvania that have many urban centers but that also have a high percentage of their population living in rural or suburban districts have not fared quite as well as D.C. in using the daily number game as the focus of their lottery games. Once again, it still needs to be determined whether the daily number game is one that can be used to introduce other forms of gambling without promoting the cannibalization effect that the introduction of these games would have on existing daily number sales.

Hence, the instant game strategy seems to provide the best basis for long-term growth. However, there are other factors that could change this perception, and these will be examined in the next section.

Future Events and Their Effect on Current Lottery Gaming
So far, it has been established that instant games can be counted on to provide a state steady growth in sales (but certainly not spectacular growth) over the long run. However, if a state is in desperate need of large amounts of additional revenue, instant lottery games do not appear to provide the answer. If the legislature is not willing to raise other forms of taxes and turns to other forms of gambling such as video poker, casino gambling, keno, or even OTB in order to raise revenue, it is commonly believed that cannibalization of existing lottery games will take place. Some maintain that the introduction of either video poker or keno will negatively affect instant game sales. The effect that casino gambling would have on overall lottery sales is also the subject of considerable debate. The extent to which the introduction of other forms of gambling cannibalizes sales of existing lottery games will be studied extensively in the next chapter.