Luck of the winners

Lotto operator seeks to enhance its market

‘Yawmiyeh’, a new daily draw game aimed at increasing market penetration | Greg Demarque

When La Libanaise des Jeux, the country’s sole concessionaire of lotteries and scratch-card games, introduced a new game last month, it was sheer coincidence that the launch event was held within five hours of a record-shattering lottery draw half a world away. Nobody could have predicted that Yawmiyeh, the new Lebanese daily draw game, would see the light just after the Powerball lottery in the United States declared that three winning tickets would each be eligible for 30 annual payments totaling around $533 million.   

In many ways, the two games couldn’t be more different from one another. Powerball jackpot amounts are determined on basis of sales revenue from tickets and payouts are shared among winning tickets. Through two revisions over the past few years, Powerball structures have been rigged in favor of producing huge jackpots with ever-lower chances of reaping them. Yawmiyeh is structured to offer fixed odds – every winner will get a preset multiple of the wagered amount, irrespective of eventual other winners.

The top prize at Yawmiyeh thus cannot be larger than LL 120 million ($80,000), based on the maximum possible wager of $2 and a multiplier of 40,000. On the other hand, there could be any number of winners and each of them would get the top payout. This exposes La Libanaise des Jeux to a small risk of ending up with a loss for a daily draw but the company has calculated that payout ratios for winners on yearly terms should be 45 percent. This, says president and largest shareholder of La Libanaise des Jeux, Rainier Jreissati, is the same risk as is taken with the other draw games operated by his firm.    

Describing Yawmiyeh as a set of three games – with bets on three, four or five numbers, in sequence or disordered – Jreissati tells Executive that the game is “cheap and easy” to play. It is marketed as a single game to the public and Jreissati expects that the daily game’s high frequency, simplicity and low barrier of entry through a minimum wager of LL 500 ($0.36) will generate new business in the Lebanese lottery market and enhance participation in the existing lottery scheme, Loto Libanais. “It is always good to have a new game and it is good for the synergy of the lottery. I am expecting something from the new game, because when you introduce a new game, the old one will work as well,” he says.

State-sanctioned lotto was introduced to the Lebanese market in the second half of the last century and has been operated by La Libanaise des Jeux since 2002. According to Jreissati, the total winnings dispersed by the lottery between 2002 and the end of 2015 amounted to $480 million and the company recognized 28 million winning tickets. Top prizes, accumulated in accordance with the jackpot principle, reach up to two to three million dollars apiece and there are 11 to 14 major wins each year.

Jreissati sees potential to boost the size of the Lebanese lottery market, which according to him is currently worth around $100 million per year, by 30 to 40 percent through adding Yawmiyeh and at least one other game that the company has in its pipeline. “I am optimistic by nature and I think that the market can perhaps reach $150 million,” he says, but concedes that it is difficult to say what game innovations would take the market to this size because of the need to take cultural factors into account and get the aiming of games at potential target groups right.

A global game

In general terms, the story about lotteries’ immense lure of immeasurable fortune is universal across history and geographies. Lottery receipts in earlier eras were used by sovereigns to finance wars and colonial expansion. Presented today generally within the context of raising funds for cultural, social and educational causes, the lotto equation works well across developed markets. According to the European and North American lottery associations, revenues from lotto and sports betting in 44 European countries amounted to 82 billion euros (2012 data) and $70 billion (2014) in the United States and Canada. No 2015 data were available from the North American Association of State and Provincial Lotteries at time of writing. A 2013 consulting study for the European Lotteries Association said, based on 2010 data, that citizens of the European Union allocated 1.2 percent of their consumer spending to gaming products offered by lottery operators in 26 EU countries.

In emerging markets, China is the big lotto story of the past decade. According to data cited by a major supplier to the country’s two official state lotteries, spending on lottery products by Chinese consumers exploded from less than 200 million Yuan Renminbi (RMB) in 2000 to over RMB 382 billion ($56 billion) in 2014 and grew to represent almost 20 percent of the global lottery market, which in 2014 was worth $284.3 billion in sales according to the World Lottery Almanac, an industry publication.

In relation to such global performances, the Lebanese lottery market is both insular and minute. La Libanaise des Jeux has some dealings with lottery operations in Africa but is reducing these activities. There are no market links between La Libanaise des Jeux and other lotteries in the Middle East and North Africa. Most Arab countries have no official lottery schemes and apart from Lebanon’s lottery program, only Morocco and Egypt have been receptive to the idea.

Probability engineering

For most of its modern history, the myth of wealth by lotto has been sustained by operators who offered players the chance to become millionaires. But recently the appeal and performance of lotteries in developed markets have been boosted by a few tricks. Operators of games in the US and the EU have employed two toolsets to fight against any waning of interest among their audiences. The first was the congregation of markets via interstate lotteries such as Powerball, Euromillions and the Eurojackpot. By combining national lotteries in Europe and state lotteries in the US into border-crossing games, operators pooled players into much larger groups and thus expanded finance flows into jackpots.

Changing the odds was the second tool. This was achieved in the case of Powerball last October by increasing the general count of numbers in the game from 59 to 69 and simultaneously lowering the number of options for the additional red “powerball” from 35 to 26. The measures increased the probability of small wins and at the same time massively lowered the probability of winning the jackpot. By reducing the chance of top-tier wins per draw, operators supported the aggregation of mega jackpots. In practical terms of jackpot amounts, lotto companies used the two tools to the effect of pushing prize ceilings from less than $100 million in the late 20th century to hundreds of millions of dollars in the past 15 years; the deliberate inflation of prizes and jackpots has now peaked in the smashing of the billion-dollar-barrier.

Low-income individuals spend the highest proportion of their incomes on lottery tickets | Greg Demarque

Low-income individuals spend the highest proportion of their incomes on lottery tickets | Greg Demarque

The frenzy factor

It can be counted on that the accumulation of mega jackpots will not cease. Nothing in state-sanctioned gaming works better than a big jackpot for simultaneously attracting players and empowering their irrational behaviors. The record Powerball jackpot in the United States last month provided proof if such was ever needed. With over $1.5 billion in the pot, some otherwise sane people drove hundreds of miles to buy their tickets in convenience stores that had sold a winning ticket in the past. Regular consumers increased their spending from their usual $2 to $10 per draw to hundreds of dollars for dozens of tickets. Lottery agents had to work overtime to serve queues of customers who wanted to part from their money for a one-in-300 million chance to be the next lotto billionaires.

The results of the people’s many irrational attempts to get extra lucky by overspending for some magic were very exciting – for the vendors and for the ultimate beneficiaries, the participating US states, that is. Reporting from sales outlets around the US, UK-based newspaper The Guardian found anecdotal evidence of gross sales increases between three and 25 fold for the January 8 to 12 sales periods when compared with an average week. For the final day before the January 13 draw at 11 p.m. Eastern Standard Time, lottery revenues were estimated at a record $600 million, up from $326 million on the day before. During just one hour on the evening of January 13, $8.6 million worth of Powerball tickets were sold in Texas alone. The New York State Gaming Commission said lottery sales in the ‘empire state’ were up by $310 million in the fiscal year ending March 2016. It reported record sales by its licensed retailers to the tune of $9.7 million in commission earnings during the full cycle of Powerball jackpot buildup between November 7 and January 12.    

United in play

International researchers into gambling addictions and socially motivated critics denounce huge jackpots as exploiting people who don’t understand the odds and decry big lotteries as regressive taxes on the poor, arguing that the highest proportions of incomes spent on lotteries come from low-income people. When asked why Loto Libanais jackpots have remained humble when compared with the mega-jackpots in developed economies Jreissati points to the very limited size of the Lebanese market versus the interstate lotteries that have access to huge player pools.

Regarding social stratification of players, he says that Lebanese from all walks of life participate in the game and that his company has found no indications that players come predominantly from low-income groups. For evidence, Jreissati points to the profiles of winners. “How can I know that people from all social groups are playing? Because when the winners come [to claim their prizes]; there are all kinds of people who are winning,” he says.

Against allegations that playing the lottery could cause the sort of problems of addiction and financial ruin that are associated with other forms of gambling, Jreissati argues that it is very difficult to lose a fortune playing the type of games offered by La Libanaise des Jeux. “You cannot lose all your money playing the lottery; even if you go crazy for a mega jackpot, it is still only one draw. Don’t cry over people who lose on one day, cry over the people that come back to gamble on each of the next seven days, trying to win back their money,” he argues. He also refutes the assumption that his company is doing better in difficult economic times because people would gamble more during periods of distress. “That is not true,” he says and explains that he believes people are reluctant to spend even one or two dollars on lottery tickets when they are short on cash.

According to Jreissati, a high degree of equal participation in the lottery applies not only on socioeconomic but also on communal terms. He claims that there are no religious objections against the games and affirms that point-of-sale outlets with the requisite gaming terminals – currently numbering 1,200 units – are distributed evenly in terms of geography. “We are present all over the country, in every single place,” he says, insisting that no region accounts for a dominant share of sales. He acknowledges, however, that the lure of a big win entices players in Lebanon just as it does anywhere. “We are well balanced in terms of regional distribution of players and players come from all income groups, but we have definitely more players when there is a big jackpot.”

In tandem, jackpots and revenues are reaching record levels worldwide | Greg DemarqueJeremy Arbid | Executive

In tandem, jackpots and revenues are reaching record levels worldwide | Greg Demarque

Winner takes a lot

The image of playing lotto in Lebanon has had positive connotations of giving to charity since the 1980s when the lottery was designated to support orphanages. Up until the early 2000s, for every draw at the Tele Liban state television network, an array of converted bicycle wheels – faintly reminiscent of the Marcel Duchamp dadaist installation, Bicycle Wheel – was operated by residents of an orphanage or charitable institution that was a beneficiary of lottery revenues. Spinning those wheels in front of boxy cameras in an austere room at the Tele Liban production center in Verdun, six youngsters every week were visually conveying the message that the lottery had been established to help the disadvantaged.

According to Jreissati, who has been involved with the lottery business in Lebanon since 1984, a guaranteed share of lottery revenues is transferred to the National Directorate for Lottery at the Ministry of Finance. With the MoF website offering no insights into the allocation of lottery revenues and Jreissati saying that the income stream is treated by the government as increasingly important, it is a compelling assumption that the chronically disadvantaged Lebanese state finances have been benefiting from the game more than any other lottery stakeholder in the past 13 years.

There is no doubt that at least as a gateway, governments are the strongest gainers from gaming activities in practically every jurisdiction with officially licensed lotteries. In the Lebanese case, the state is a triple winner. The MoF takes not only a guaranteed amount off the top of every sold ticket, it also comes to knock on the doors of every winner for taxes and it thirdly collects corporate taxes from the operator.

In hard bucks, the state share of gross revenue comes out at 42 percent, or north of $40 million annually, given sales of around $100 million as stated by Jreissati. From the winners of payouts, La Libanaise des Jeux is mandated to deduct 10 percent in tax on behalf of the state and transfer these amounts to the authorities. At the 45 percent payout ratio to winners, the annual tax yield related to $100 million turnover would come to over $4 million. Adding in the corporate taxes that La Libanaise des Jeux pays on its income, it does not seem too daring to say that an annual lotto jackpot approaching $50 million goes to the treasury.

Humble rewards

Operating a state-sanctioned lottery appears to be a low-risk and fairly steady enterprise. However, when accounting for the guaranteed payouts and for the state share of revenues, plus distribution costs of 5 percent that go to the independent ticket resellers in La Libanaise des Jeux’s point-of-sale network, it presents itself as anything but a license to print your own money. After overheads and marketing costs, the profit margin for the company is less than 2 percent of annual revenues, Jreissati says. “The setup is heavy; we have more than 100 employees, and when we don’t sell, we lose,” he adds.

The company’s concession for operating the lottery extends for another eight years, based on a renewed contract with the government. In winning the new contract, which includes an obligation to guarantee the state revenues of LL 50 billion ($36.34 million) per annum during the current concession period, La Libanaise des Jeux last year faced a single competitor since a foreign company decided not to enter a bid after reviewing the terms of reference. “The market is not that attractive,” Jreissati admits. The narrow margins under the concession are making it challenging to survive and newcomers would have to invest great amounts if they wanted to build it up with a different arrangement, he adds.

In operating the concession since 2002, La Libanaise des Jeux achieved strong growth of their franchise until 2005; it experienced a slump in 2006, followed by “normal growth rates” until the present, Jreissati says. For expanding into the daily game, the company has committed to renewing and enlarging its network of lotto terminals from currently 1,200 to 1,500 units. Based on a cost of $3,000 per terminal this will require investment of $6 million, or the equivalent of four years’ profit.

Projections by market research companies see future growth drivers for the global lottery market in mobile gaming and in upswings of national economies that would entice people to increase their leisure spending, of which playing the lottery is a big component. For Lebanon, Jreissati estimates that a return to economic growth could boost his business by double-digit percentages. As to the potential for shifting the game to mobile, he says that deployment of an app had been intended to coincide with the launch of Yawmiyeh in January.

The app was not completed in time for the launch but Jreissati appears unfazed by the delay as he is far from following the hype for everything mobile. “I don’t believe that online and mobile gaming will take a big part of the market,” he explains, pointing to persistent distrust by many people in usage of credit cards and to the importance of social aspects of buying a ticket in a neighborhood store. Where online and mobile lottery options could be a boon in Jreissati’s view is the mobilization of expatriate Lebanese who trust the lottery in their home country. By playing from wherever they are in the world, they would bring new money into the country. “This is good for us and for the government,” he says with the optimism of someone who unfailingly trusts in his luck.

Thomas Schellen

Thomas Schellen is Executive's editor-at-large. He has been reporting on Middle Eastern business and economy for over 20 years.

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