Can The PA iLottery Profit $250 Million In Five Years, And What Happens If It Doesn’t?

Lottery spokesman Jeffrey Johnson set the bar high when he said the PA online lotto will profit as much as $250 million in five years. Is that figure attainable? David Huber takes a close look.
Lottery balls in a funnel
Editor’s update: The $97 million in revenue for 2017 (and $48 million for 2016) reported by the Michigan iLottery is net win, not gross gaming revenue. Based on this, we now believe it’s much more plausible the PA iLotto will achieve $250 million in net win over its first five years.  
A recent article published by the Pennsylvania Tribune outlines how the state plans to generate an extra $250 million in online lottery revenue by the year 2023.
The PA lottery, which has been in operation for nearly half a century, is unique in that it earmarks its entire net profit (roughly 26% — or $1.044B — for Fiscal Year 2016-2017) towards programs that benefit elderly residents of the Keystone State.
Provisions to expand the government-sponsored gambling vertical from traditional Point of Sale terminals to the internet were part of broad iGaming legislation signed into law by Gov. Tom Wolf late last year.
“Over the first five years, we predict these new categories could generate up to $250 million in new profits to support benefits for older adults,” lottery spokesperson Jeffrey A. Johnson told TribLive.

PA online lottery must be competitive to reach target

Although precise sales figures for states that have legalized iLotto products can be hard to come by, there is enough data available to suggest that the $250 million revenue target over the next half-decade is a lofty goal — one that may require continuous innovation.
The state achieved approximately $4B in land-based lottery sales for the Fiscal Year ending June 30th, 2017 — and would only need to secure one-twentieth of that amount per year ($200 million) through mid-2023 to obtain the $250 million in extra revenue — assuming Point of Sale demand, profit margins and overall operational costs remain steady.
However, based on the performance of nearby Michigan’s online lottery (which increased iLotto revenue 103% in FY 2016-17, but only to $97 million), there’s reason to believe that seemingly miniscule figure will be difficult to achieve.
Admittedly, socioeconomic disparities between PA and Michigan do favor the Keystone State — namely its larger population — but the divide doesn’t seem large enough to organically drive PA online lottery sales to $1B through FY 2022-2023.
And even if it was, there are forces in PA not present in MI, that could negatively impact the industry, namely unprecedented competition and potential cannibalization threats from regulated online gambling interests.

Differences between iLottery and iGaming payouts

While it is true that online lottery sales in Michigan have soared after the Wolverine State authorized iLottery products in 2014, the Michigan iLottery is not currently facing direct competition from regulated internet gambling services that typically offer customers superior long-term payout percentages.
Furthermore, government-run gambling verticals are vulnerable to annual budget impasses which historically result in temporary lottery payout freezes, as witnessed by last year’s Powerball/Mega Millions debacle in Illinois.
Add to that an increasingly-savvy gambling clientele capable of deciphering where to obtain the best “bang for their buck,” and Pennsylvania could be forced to further improve its lottery payout percentages to customers in upcoming years. Profit margins for the PA lottery have already shrunk a whopping 13% over the past decade according the official 2017 Pennsylvania Lottery Profit Report (see Page 3). This trend will likely continue as the vertical strives to remain competitive with the state’s authorized gambling outlets.
Of course, it’s currently unknown if the lower house edge online casinos will cannibalize revenue from iLottery, given that Pennsylvania will be entering into uncharted territory when it becomes the first state to go live with both options. Neither industry has an example based in the US to gauge potential customer overlap between the two sectors.

But the PA lottery benefits the elderly…

The “help the elderly” approach to convincing lottery enthusiasts to embrace clear mathematical expectation disadvantages compared to other gambling options may be effective for first-time purchasers or jackpot-crazed casual players, but does little in terms of customer retention.
Land-based casino operators are likely well aware of this dynamic when it comes to their own veteran players, whose sympathetic approach to utilizing disposable income towards goodwill spending versus time on machine entertainment (on a scale of 1-to-10) is roughly zero.

Regulated PA internet gambling to face hostile competition?

As witnessed by the oppressive 54% tax rate on Gross Gaming Revenue (GGR) from regulated online slot machines in the Keystone State, lawmakers have little regard for or understanding of the plight of incoming operators.
Simply put, states are fully aware that their regulated licenses are in high demand, and can use that leverage to extract maximum value from legalized iGaming interests.
If PA online lottery sales before 2020 do not match up with the five-year, $250 million profit benchmark set by officials, the state could seek out other methods to maintain its senior citizen outreach. This in turn could mean added pressure on what promises to be an extremely competitive regulated internet gambling environment in the Keystone State.
As speculative as this is, the possibility of government chagrin seems viable if online lottery purchases aren’t on pace to double current sales from Michigan (a state that has only 25% fewer residents and a median income shortfall of 8% compared to Pennsylvania — and does not currently offer regulated internet gambling).
Which is why the recent five-year, $250 million figure cited by the Pennsylvania Lottery should cause concern from incoming iGaming operators who are in the process of setting up shop within PA’s borders.

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