Perspective on the Future

of the Lottery

August 31, 2015

Prepared by the staff of

The Maryland Lottery,

Gordon Medenica, Director

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Summary Report

As the State of Maryland implemented its casino gaming program, there was

understandable concern about the impact of the casinos on the Maryland Lottery. As casinos

opened, the Lottery was indeed experiencing declines in its revenues, reinforcing the assumption

that the casinos were taking market share from the Lottery. Consultants who studied the issue

released reports estimating the size of these impacts as ranging from a -1.5% to -5.5%, depending

on the timing of various casino openings (see Exhibit A). Reinforcing those estimates, Lottery

revenues did decline 2.2% in FY 2013 and another 1.8% in FY 2014. This slump was reversed in FY

2015, with Lottery revenue increasing by 2.2%, although still below the record level of FY 2012.

(See Exhibit B for comparative revenue data.) Maryland’s casinos opened in 2010, 2011, 2012,

2013, and 2014.

With this background, legislation was passed in 2014 that created a task force to study

the impact of casinos on the Lottery. For a variety of reasons, the task force did not produce such

a study before the legislation expired, but the Lottery volunteered to produce this “White Paper”

to address the concerns raised in the original request.

This report will offer a combination of objective data and subjective assessments to

explain past performance and to suggest future trends. Overall, it is our belief that the

introduction of casinos was not the primary cause of Lottery revenue declines, although the

casinos did have a small negative impact.

The first item in the legislative request was to study the causes of the decline in Lottery revenue.

Our view of the market and competitive situation in Maryland takes in additional factors

that we believe also had significant impacts upon Lottery performance, not just the introduction

of casinos. These factors include: 1] the significant reduction in the Lottery’s marketing budget in

2010 (down 43%, from $20.1 million to $11.4 million); 2] the distraction of management time

and attention away from the Lottery during the launch of the casino program; 3] the poor

performance of the national jackpot games (Mega Millions and Powerball); and 4] the relatively

weak performance of the instant (scratch-off) game category in Maryland.

The lottery industry is a mass-market consumer entertainment business that relies heavily

on marketing to achieve its revenue goals, as is the case for most consumer products. Overall,

advertising spending accounts for roughly 2% of national GDP. Advertising spending is usually

expressed as a percentage of sales, a metric known as the ad/sales ratio. Ad/sales ratios vary by

product and by industry, with some industries, such as casinos, spending over 20% of sales on

advertising and promotion (N.B., “promotion” spending - e.g., coupons, rebates, discounts, etc.

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– often exceeds spending on media and advertising). In many consumer businesses, 2% is a useful

rule-of-thumb for their ad/sales ratio. In the lottery industry, the average ad/sales ratio across

all U.S. lotteries is 1.2%. In Maryland, it is only 0.7%. (See Exhibit C.)

At the New York Lottery, it was conventional wisdom that a dollar of advertising spending

generated an incremental $5.00 in profit (not just sales). To test this, the New York lottery

engaged an econometrics-based brand research agency to study the relationship between

advertising, sales, and profits. The findings actually supported the old rule-of-thumb, that an

incremental dollar of advertising generated $5.00 of incremental profit. (As an aside, the New

York Lottery is the largest and most profitable in the country, with a total marketing budget of

$92 million.)

With such a limited marketing budget, the Maryland Lottery has significantly under-

invested in consumer advertising and promotion. We believe this has been one of the reasons

for the revenue declines.

A second factor in the decline is the distraction of management’s time and attention away

from the Lottery during the implementation of the casino initiative in Maryland. The rollout of

casinos was an all-consuming, intense effort for the entire organization, with Lottery issues,

creativity, direction and focus all suffering. Clearly, this is a highly subjective assessment, but it is

supported by managers, staff, partners, vendors, and industry observers. The build-up of the

regulatory apparatus and infrastructure to support casino gaming was a monumental task, and

the results were exemplary. It is to the credit of management and staff that so much was

accomplished in this time, but unfortunately, the Lottery did lose some momentum.

A third factor in the weak results was the ongoing decline in the national jackpot games,

Mega Millions and Powerball. After the lottery industry achieved its groundbreaking agreement

in 2009 to allow all lotteries to cross-sell both games, sales soared along with a string of record

setting jackpots. Then, two years later, Powerball was moved to a $2 price point, and another

surge of sales followed. However, since then, a lack of large jackpots has caused substantial

declines in total sales of Mega Millions and Powerball nationwide. In Maryland, these games

went from 11.9% of sales in 2014 to 9.7% in 2015. (See Exhibit D.)

A final issue for the Lottery during this time was the relatively weak (although historical)

performance of the instant (scratch-off) game category. Across the industry, instant sales

accounted for 60% of total sales in 2014; In Maryland, they generated less than 28%. Although

this was always the case, even in the early days of the Lottery, it tempers the argument from the

impact of casinos. As the consultants noted, the most vulnerable games from casinos are Keno

and instants. Keno is indeed a very strong game in Maryland, and losses there can be partially

attributed to the casinos. But the instant category was weak to begin with, and its decline during

the period was not simply from casino erosion. (Fortunately, the instant business has begun a

very strong recovery, growing almost 14% to an all-time record of $546 million in FY 2015.) (See

Exhibit E.)

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For these several reasons, we believe the Lottery’s weak performance in recent years had

many causes, including (but not primarily due to) the casino program rollout in Maryland. (See

Exhibit F.)

The next item in the legislative request was to explore potential innovations that could improve

the lottery experience and restore revenues.

The modern lottery industry, which began in the 1960s, has benefitted from many waves

of innovation. Much of the innovation has come from the vendor community and from third party

entrepreneurs, but some has come from the lotteries themselves. Most lotteries have quickly

adopted these innovations as they spread throughout the industry. (See Exhibit G for a brief

history of lottery innovations.)

The legislative request included some specific suggestions that can be addressed

relatively easily, such as multi-state raffles. Raffles have been a common lottery game style since

the beginning of the modern lottery industry in the 1960’s. Raffles have come and gone, and a

few performed well in some jurisdictions. For the most part, however, raffles have lost their

consumer appeal as a game style, and very few lotteries have had successful raffle experiences

in the last several years. The industry did launch a multi-jurisdiction raffle in 2013 (The Halloween

Raffle), with seven states participating. Despite several creative twists, the game performed very

poorly in almost every jurisdiction that launched it. (See Exhibit H.)

Nevertheless, raffles, in all their permutations, are part of any product development

discussion in all jurisdictions. We are acutely aware of the success of games such as El Gordo in

Spain, which, for many historical and cultural reasons, remains the largest raffle game in the

world. All attempts to replicate that level of success have failed.

Another suggestion was to expand lottery tie-ins with sports teams. This is already an area

of good experience and success for the Maryland Lottery. Our Ravens scratch-off ticket is

considered the top NFL-themed instant ticket in the industry. We have also had success with an

Orioles themed ticket, although we also were equally successful with a generic baseball-themed

ticket that did not require an expensive license fee. We have relationships with minor league

baseball teams, the University of Maryland, and others on promotions and events. (See Exhibit

I.)

A third suggestion was to create special lottery games earmarked for specific purposes or

causes. Several states, in particular Illinois, have launched such games, supporting good causes

such as breast cancer, AIDS research, veterans, and multiple sclerosis. These efforts are often

proposed by well-meaning advocates who see them as both a fundraising mechanism and an

awareness booster. However, nearly all of these games have failed badly at retail, selling well

below similar priced instant tickets.

In fact, a former Illinois Lottery head stated in an industry presentation that the good

causes would be better served by simply directing profits from a regular lottery ticket to the good

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cause, without the “opportunity cost” of taking up valuable shelf space at retail with an under-

performing ticket. Of course, this would require legislative action, which may be opposed by the

other good causes that already receive lottery funding. Also, the benefits of the awareness

campaign generated by cause-based tickets were not deemed significant. (See Exhibit J.)

A fourth idea was to analyze Lottery retailer commissions and bonus incentive programs,

presumably with an eye to increasing revenue but perhaps also to reduce Lottery expenses and

increase profits. Currently, Lottery retailers earn 5.5% on all sales of lottery products, a figure

that is set by statute. In addition, retailers can earn an additional 3% for cashing winning tickets

(up to $599 for most retailers, and up to $5000 for certain XCAP retailers that have passed more

stringent licensing requirements). In total, the weighted average commission for all retailers was

7.2% in FY 2015, with total retail commissions paid growing 5.3% to $128.6 million. Retail

commissions are the second largest cost item for the Lottery, after prizes to players.

Although industry-wide figures are incomplete for 2015, we believe Maryland is among

the top five in retailer commissions. In addition, retailers can earn special bonuses for selling top

prizes in certain games and by participating in special promotions throughout the year. However,

across the industry, there is no direct relationship between the level of retailer commissions and

sales performance. For most retailers, the reason for offering lottery products is the foot traffic

it drives into their stores, not the commission rate. (See Exhibit K.)

Finally, the legislative request suggested looking into several areas related to selling

games over the internet. Needless to say, this is an all-consuming issue for the lottery industry

and Maryland has been at the forefront of developments in this area. Most lotteries fully

understand that they will need to sell their products online to remain relevant into the future, to

attract younger players (who do not carry cash and do not visit typical lottery retailers) and to

offer more exciting games that take advantage of the technology of gaming today. Lotteries

understand and accept these tenets as known facts. However, the issue is controversial, with

public policy debates at both the state and federal levels.

The first level of opposition comes from our own best partners, our retailers. The retail

community is well organized in their opposition to lottery sales on the internet, but badly

misinformed about potential negative consequences for their businesses. The lottery industry

and its vendor partners have shared voluminous data on the experience of lotteries selling on

the internet, first from Europe and more recently from Canada and the US, which clearly shows

that brick-and-mortar retail lottery sales continue to grow even when lotteries also sell on the

internet. Despite such hard evidence to the contrary, the retail community, led by the National

Association of Convenience Stores, remains deeply opposed to lottery internet sales.

Consequently, lotteries are reluctant to alienate their retail partners, since they recognize that

the overwhelming bulk of their sales in the foreseeable future will still come from retail outlets.

This is because the revenue potential from internet sales is relatively modest. Of the four

US states that offer lottery games on the internet, only Michigan has reached even 4% of sales in

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the channel; Delaware only has 1.5% and all the others have less than 1% in internet sales. In

New Jersey, where internet gaming is conducted by their casino industry, sales are about $120

million (vs. the $3 billion in sales generated by the lottery). Modest revenue opportunities mean

that policy makers are reluctant to fight opponents of internet gaming for the relatively small

amounts at stake. (See Exhibit L.)

Further controversy surrounds the issue in the struggle between advocates of federal rule

making (either for a federal land grab of the internet or conversely, a federal ban on internet

gaming) vs. supporters and advocates for states’ prerogative on gaming issues, which has

historically been the case. The lottery industry nearly unanimously supports continued state

control of gaming policy decisions.

The marketplace inevitability of the internet is quite clear. Massive shifts in consumer

behavior and buying patterns have already occurred. Lottery tickets are one of the few items that

cannot be purchased easily on the internet. Despite proven performance of geo-location and age

verification technology, some opponents remain skeptical of the ability of lotteries to control the

location and age of online players. The fact that the technology works 99% of the time is

considered inadequate by some opponents (but, would you not build a highway because you

could not guarantee that 100% of motorists would obey the speed limit?).

Beyond the issues raised in the legislative request, how will the Lottery grow in the future?

The Maryland Lottery, despite being a high-performing lottery in comparison to its peers,

still has several opportunities for growth. As elaborated earlier, these include:

Higher marketing budgets, to drive all sales.

Continued growth in instant games, with a goal of reaching 50% of total sales.

Additional retailers, to reach the industry best practice level of one retailer per 1100 to

1200 people in the state, which translates to an additional 10% growth in the retail

network.

New draw games, such as the upcoming Cash4Life.

Enhancement and redesign of the national jackpot games (coming to Powerball in

October) to revive that category of games.

Continued investment in digital activity, second-chance games, loyalty programs, mobile

apps, and social media.

We believe Maryland Lottery revenues can continue to grow despite the maturation of

the casino business and the launch of a sixth casino next year.

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Exhibit A

Consultants’ Reports

The Maryland Lottery hired consultants to determine if the introduction of casino gaming

had affected lottery sales. This research was the first study to analyze proximity as a factor in

determining the impact of casinos on lottery sales. The Study – “How Casinos Have Affected

Maryland Lottery Sales” - was presented to the Maryland Lottery and Gaming Control

Commission in August 2014. The results of the study indicate that a casino’s proximity to lottery

retailers is important. They analyzed lottery data from July 2009 through February 2014 and

determined that the State’s casinos were estimated to have a negative impact on lottery sales of

2.88%, or -$50.1 million annually, in each of their first year(s) of operation.

The consultants also estimated the impact Horseshoe Casino Baltimore and MGM

National Harbor will likely have on lottery sales. They noted, “Horseshoe Casino Baltimore is

expected to cause a decline in lottery sales of 1.53%, or -$26.7 million” and that “MGM National

Harbor is expected to cause a decline in lottery sales of 1.07%, or -$18.7 million.” When all casinos

are operational, the consultants predict that “the total annual effect of all 6 casinos is estimated

to be -$95.5 million, or about -5.5%” assuming no other significant changes” in lottery or gaming

operations.

Another important finding from the study is that “the Maryland Lottery’s Keno game

experiences a strongly significant decline in revenues in closer proximity to casinos. This decline

is not unusual because casinos offer Keno-style games either ‘stand-alone or as components of

video casino games.’” Since casino games are similar, they act as close substitutes. The report

notes, “[O]ne might argue that since a casino is perhaps a more comfortable setting in which to

play Keno, it would be a preferable choice to the Lottery’s Keno game.”

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Exhibit B

Comparative Revenue Data

Since 2004, lottery sales worldwide have increased year-over-year, with growth rates

varying from as low as 1% to as high as 17.2%. In 2014, the Maryland Lottery ranked 36th among

lotteries worldwide in total sales.

Maryland Lottery ranks 8th among lotteries in the U.S. in per capita sales and 3rd among

states that border Maryland.

Top 10 U.S. Jurisdictions in Sales Per Capita in FY 2014

# Jurisdiction

Population (Millions)

Total Sales

(Millions)

Per Capita Sales

1 Massachusetts 6.7 4,853.6 $720

2 New York 19.7 7,314.2 $370

3 Georgia 10.1 3,739.9 $370

4 D.C. 0.7 216.0 $328

5 New Jersey 8.9 2,908.1 $325

6 Connecticut 3.6 1,112.4 $309

7 Pennsylvania 12.8 3,799.6 $297

8 Maryland 6.0 1,724.0 $288

9 Michigan 9.9 2,596.4 $262

10 South Carolina 4.8 1,264.4 $262

Source: La Fleur’s 2015 World Lottery Almanac: Lottery Sales

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Total Sales Per Capita for FY 2014 - Maryland Border Jurisdictions

# Jurisdiction Population (Millions)

Total Sales (Millions)

Per Capita Sales

1 D.C. 0.7 216.0 $328

2 Pennsylvania 12.8 3,799.6 $297

3 Maryland 6.0 1,724.0 $288

4 Virginia 8.3 1,810.8 $217

5 Delaware 0.9 148.4 $159

6 West Virginia 1.9 188.6 $102

Source: La Fleur’s 2015 World Lottery Almanac: Lottery Sales

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Exhibit C

Industry Advertising Levels

Various consumer industries invest in marketing, advertising, and promotion at greatly different levels.

Industry Sector Ad to Sales Ratio %

Consumer Products 6.5

Health Care 3.0

Retail 1.6

Financial Services 1.6

Electronics & Scientific Instruments 1.5

Computers & Software 3.0

Transportation & Travel 2.2

Services except Healthcare 2.0

Construction & Real Estate 2.8

Communication Products & Services 3.2

All sectors combined 2.0

Top 10 Lottery Jurisdictions by Ad to Sales Ratio %

# State Population

(Millions) Projected Ad Budget Ad to Sales Ratio %

1 Nebraska 1.9 $5,645,500 3.5

2 D.C. 0.7 $6,434,350 2.7

3 Delaware 0.9 $3,500,000 2.4

4 North Dakota 0.7 $680,350 2.3

5 Colorado 5.4 $11,462,000 2.1

6 Arizona 6.7 $15,500,000 2.0

7 Idaho 1.6 $4,075,476 1.8

8 Louisiana 4.6 $7,500,000 1.8

9 New Mexico 2.1 $2,500,000 1.8

10 Washington 7.1 $10,500,000 1.7

30 Maryland* 6.0 $11,568,957 0.7

National Total $567,083,251 1.2 *Maryland is tied with FL, MI, NJ, SC, and TX, all with 0.7%

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Advertising Budgets in Border Jurisdictions

Jurisdiction Population (Millions)

Projected FY 2015 Ad Budget (Millions)

Delaware 0.9 $3,500,000

D.C. 0.7 $6,434,350

Pennsylvania 12.8 $37,000,000

West Virginia 1.9 $5,240,000

Virginia 8.3 $19,930,000

Maryland 6.0 $11,568,957*

Source: La Fleur’s 2015 and 2014 World Lottery Almanacs: Game Ad Budgets by State

*Actual appropriated amount for FY 2015.

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Exhibit D

National Jackpot Games

Multi-state jackpot game sales have seen a significant decline over the past two years.

For example, in FY 2015, Powerball sales decreased 40% from FY2014.

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Exhibit E

Instant Games

In 2014, instant game tickets accounted for 60% of the total sales from all U.S. lotteries.

Among jurisdictions that border Maryland, the percentage of sales from instant tickets was

52.3%.

2014 Instant Ticket Sales by States with Similar Populations

Jurisdiction Population

(Millions) Scratch-Offs

(Millions) Total Sales

(Millions) Percentage

of Sales

Minnesota 5.5 $351.6 $531.5 66.1%

Missouri 6.1 $766.6 $1,157.1 66.2%

Tennessee 6.5 $1,051.2 $1,319.1 79.7%

Wisconsin 5.8 $337.7 $568.8 59.2%

Maryland 6.0 $479.6 $1,724.0 27.8%

Source: La Fleur’s 2015 World Lottery Almanac: Lottery Sales

2014 Instant Ticket Sales in Neighboring States

Jurisdiction Population

(Millions) Scratch-Offs

(Millions) Total Sales

(Millions) Percentage

of Sales

Delaware 0.9 $50.7 $148.4 34.2%

Pennsylvania 12.8 $2,444.9 $3,799.6 64.3%

West Virginia 1.9 $105.6 $188.6 56.0%

Virginia 8.3 $988.6 $1,810.8 54.6%

Maryland 6.0 $479.6 $1,724.0 27.8%

Source: La Fleur’s 2015 World Lottery Almanac: Lottery Sales

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Exhibit F Casinos in Maryland

The casino gaming industry in Maryland continues to grow with the opening of Horseshoe Baltimore in August 2014. The Maryland Lottery is competing for consumer spending in the gaming category, as well as a share of voice in the advertising arena.

The casinos in Maryland opened on the following dates:

Hollywood Casino September 2010

Casino at Ocean Downs January 2011

Maryland Live! Casino June 2012

Rocky Gap Casino May 2013

Horseshoe Casino August 2014

MGM National Harbor October 2016 (projected)

In calendar year 2014, the state’s five casinos spent a combined $46.1 million on marketing.

Casino participation is higher among Lottery players than non-Lottery players, evidence that the Lottery’s player base is spreading its discretionary gaming dollars between traditional lottery games and the casinos.

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Exhibit G

A Brief History of Lottery Industry Innovations

1964: The New Hampshire Legislature created the state lottery, the first legal lottery in this

century; it was labeled a “Sweepstakes” and tied to horse races to avoid the 70-year-old

federal anti-lottery statutes.

1967: New York became the second state to start a lottery.

1971: Lottery sales nationwide surpassed the $100 million mark for the first time.

1971: Automated Wagering implemented the world’s first online system in New Jersey.

1973: Fiscal year sales for all lotteries surpassed $500 million.

1973: Scientific Games developed the first secure instant ticket.

1974: Massachusetts offered the first scratch-off ticket.

1975: Federal law was amended to allow state lotteries to advertise on radio and TV.

1976: Lottery sales surpassed $1 billion for the first time.

1978: Both New York and Massachusetts introduced off-line lotto, a European player selection

game in which the player selects six numbers between 1 and 30.

1985: Tri-State Lotto, the first multi-state lottery, linked the state lotteries of Maine, New

Hampshire, and Vermont.

1986: The Illinois Lottery introduced the first instant game with the concept of qualifying

“entry” tickets for a grand prize drawing.

1988: Keno was introduced by the New York Lottery.

1988: The Multi-State Lottery Association began with Oregon, Iowa, Kansas, Rhode Island,

West Virginia, and the District of Columbia as initial members.

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1989: South Dakota became the first state in the U.S. to license and regulate video lottery

games.

1991: The Virginia Lottery awarded the first instant ticket vending machine contract.

1996: The Big Game began with Georgia, Illinois, Massachusetts, Maryland, Michigan, and

Virginia as initial members. (Later, changed name to Mega Millions)

1998: The Multi-State Lottery Association recorded a world-record lottery jackpot to date of

$295.7 million for its Powerball game.

1999: Thirty-seven states and the District of Columbia operate a lottery in the U.S., while

lotteries are legal in all Canadian provinces and territories. More than 100 foreign

lotteries exist and many have operated for centuries. Some counties, like Mexico,

France, and Japan, have national lotteries. The World Lottery Association lists 63

member nations – one on every continent except Antarctica.

2000: The largest lottery jackpot in history to date is shared by winners from Michigan and

Illinois. Both winners of the May 9 Big Game drawing elect to receive cash payments of

approximately $90 million as their share of the $363 million (annuity) jackpot.

2006: The largest jackpot in history to date of $365 million is awarded on February 18

Powerball drawing. The prize was shared by eight co-workers at a Lincoln, Nebraska

food processing plant.

2010: “Cross Sell” initiative called for U.S. Lottery jurisdictions that only sold Powerball and/or

Mega Millions tickets to begin selling both games at the same time. This led to a surge in

sales.

2012: Powerball goes to $2; sales surge.

2014: Wyoming starts lottery; 44 U.S. States plus the District of Columbia now offer lotteries.

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Exhibit H

Raffle Games

The most basic lottery product is a raffle game. A raffle is a game where players purchase

a ticket with a pre-determined number of tickets and wait an extended period of time to see if a

ticket with a matching number is drawn at random.

In recent history, raffle games have not been a successful product. In 2014, 19 states

offered raffle games, averaging just $4.9 million in sales. Raffle games do not supply the sales

projections the Maryland Lottery needs to reach its goals moving forward.

In FY14, seven states launched the $10 Halloween Millionaire Raffle including Michigan,

Oregon, Iowa, Indiana, New Jersey, New York, and Illinois. Sales for the 4-to-8 week (varied by

state) raffle game were not successful. Oregon was the only participating state that reported a

sellout of their game.

Halloween Millionaire Raffle FY 2014 Sales

State Raffle Sales FY 2014 Total Sales

Michigan $2,538,420 $2,596,400,000

Oregon $2,500,000 $310,100,000

Iowa $242,960 $314,100,000

Indiana $541,280 $1,018,700,000

New Jersey $1,227,770 $2,908,100,000

New York $1,832,850 $7,314,200,000

Illinois $6,717,140 $2,791,800,000

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Exhibit I

Sports Marketing Partnerships

Maryland Lottery research studies have traditionally shown that Maryland Lottery player

interests consistently match those of the Maryland sports fan. In particular, 85% of Lottery

players in Baltimore and surrounding counties are interested in professional sports.

Since 2009, the Maryland Lottery has partnered with the Baltimore Ravens, Baltimore

Orioles, and Mid-Atlantic Sports Network on strategic sports marketing partnerships.

In 2009, the National Football League lifted restrictions relating to Lottery category

partnerships and advertising. That same year the $5 Ravens Cash Fantasy scratch-off ticket went

on sale in Maryland. Success of the game can be attributed to being the first $5 scratch-off game

with a $1 million top prize—a top prize traditionally reserved for $20 games—and unique second

chance prizes such as Season Tickets for 20 Years. This type of value proposition has been the

foundation for the Lottery-Ravens partnership for seven years. Sales for the football themed,

licensed $5 Ravens scratch-off has performed 19.2% better than the average $5 game.

The success of the Ravens partnership laid the groundwork for the Maryland Lottery

expanding its partnership with the Baltimore Orioles and Mid-Atlantic Sports Network (MASN).

Since 2011, the Orioles and MASN partnerships have given players the opportunity to become

the Maryland Lottery Contestants of the Game and win cash prizes related to Double Plays,

Strikeouts, and Home Runs. Sales for the baseball themed $5 scratch-off has performed 25%

better than the average $5 game.

Media fragmentation continues to be a major problem in attracting consumers. Sports

media through strategic sports marketing partnerships, on the other hand, continues to be a

solution to that problem by attracting a captivated audience with a number of media solutions

available including: Television, Radio, In-Stadium Signage, In-Stadium Video, and Digital

Advertising.

With the recent successes of the Ravens (2012 Super Bowl Champions) and Orioles (2014

American League East Champions) on the field, the partnerships in Maryland have proved to be

successful all around. Interestingly, other states have not had similar levels of success with their

partnerships being too expensive and not worth the investment.

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The Maryland Lottery will continue to evaluate the components of these partnerships to

ensure the continued relationships are warranted.

Outside of the two Baltimore sports franchises, sports marketing partnerships also exist

with the Washington Redskins, Orioles minor league baseball teams, University of Maryland

Terrapins, Towson University Tigers, and Coppin State University Bald Eagles. These partnerships

are meant to increase brand awareness by leveraging the sports media landscape.

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Exhibit J

Scratch-offs to benefit specific causes

The implementation of lottery games for specific beneficiaries has been discussed and

implemented within the industry for many years. However, many lotteries are hesitant to move

forward with such initiatives, as the few games that have been taken to market have performed

poorly.

The Illinois Lottery is the industry leader in this area, having launched several scratch-off

tickets to benefit special causes in Illinois. Unfortunately, each ticket performed well below the

average index.

Price Point Name/Cause Performance Index

(% of average ticket)

$2 Ticket for the Cure Profits dedicated to help fight against breast cancer

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$5 Veterans Cash Profits dedicated to support military service veterans

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$5 The MS Project Profits dedicated to help fight against multiple sclerosis

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$5 Red Ribbon Cash Profits dedicated to help fight against HIV/AIDS

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Considering the lack of success of these tickets, it would not benefit the State of Maryland

to replace an average-performing game with a poor-performing game. While there is certainly

some nominal benefit to each of the specific causes, it comes at the expense of higher-revenue

generating tickets. It would be better to have a high-performing scratch-off program and

dedicate a certain amount of lottery revenue to a specific cause than it would be to have a low-

performing specific cause ticket.

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Exhibit K

Retailer Commissions

Each Maryland Lottery licensed retailer receives a selling commission of 5.5% of that

retailer’s gross receipts from all ticket sales at the retailer’s business establishment. Each

Maryland Lottery licensed retailer also receives a cashing fee commission not to exceed 3% of a

valid prize paid to a player for cashing that player’s winning prize tickets.

Number of Retailers and Total Commissions Paid by Fiscal Year

Fiscal Year FY 2015 FY 2014 FY 2013

# of Retailers 4,536 4,490 4,422

Total Commissions $128,596,268 $122,109,073 $119,788,227

In FY 2015, Maryland Lottery retailers saw an increase of $6.5 million in total commission

paid (5.3%) over FY 2014.

In addition, Maryland Lottery retailers rank among the top in the U.S. for commissions

paid by percentage of sales.

Highest Commissions Paid by Jurisdiction - National

National Ranking

Jurisdiction

FY 2014 Retailer

Commissions (Millions)

Retailer Commissions

(% of Sales)

1 Oregon $26.3 8.47%

2 Colorado $40.2 7.38%

3 Michigan $188.5 7.26%

4 Rhode Island $17.4 7.18%

5 Maryland $122.1 7.08%

Source: La Fleur’s 2015 World Lottery Almanac: FY14 Commissions

When compared to states that border Maryland, our retailers are at the top for

commissions paid by percentage of sales.

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Highest Commissions Paid by Jurisdiction - Regional

Jurisdiction

FY 2014 Retailer

Commissions (Millions)

Retailer Commissions

(% of Sales)

Maryland $122.1 7.08%

West Virginia $13.2 7.00%

D.C. $14.2 6.56%

Delaware $9.4 6.33%

Virginia $101.5 5.61%

Source: La Fleur’s 2014 World Lottery Almanac: FY13 Commissions

Special Bonuses

Licensed lottery retailers also have the opportunity to earn special bonuses. Our statutory

authority allows the Maryland Lottery to authorize the payment of special bonuses to licensed retailers and their employees. However, the statutory authority is limited in that “the total of the bonuses may not exceed one–half of 1% of the gross receipts from ticket sales for the year for which the bonuses are awarded.”

One example of this special bonus opportunity is when a retailer sells a top-tier winning

ticket on a specified lottery game. The retailer has the opportunity to earn a big bonus when the

player wins a top-tier prize. The chart below depicts the specific games and bonus amounts

authorized by the Maryland Lottery.

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*Maximum bonus: $100,000. Shared jackpots determine shared bonus amounts.

In FY 2015, the Maryland Lottery awarded retailers $427,325 in bonuses under this

program. Below is breakdown by game of the bonuses retailers received in FY 2015.

FY2015 Retailer Bonuses by Game

Powerball Mega

Millions Multi-Match

Bonus Match 5

Keno Racetrax

5 Card Cash Scratch-Offs TOTAL

$36,000 $2,500 $5,256 $22,505 $18,048 $344,017 $427,325

Special Selling Incentive Bonus

Periodically throughout the year, the Maryland Lottery offers its retailers a special selling

incentive bonus for sales on specific scratch-off games, such as the Holiday tickets, the Ravens

ticket, and Baseball Bucks. In FY 2015, the Maryland Lottery awarded retailers $70,675 in

incentive bonuses under this program. A bonus incentive paid to a retailer under this program

varies by game and marketing promotion.

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Exhibit L

The Consumer Shift to Digital and e-commerce

Mobile

The consumer shift to digital has now shifted to mobile devices. According to eMarketer,

over the past five years the US smartphone market has “exploded to an estimated 190.5 million

users in 2015 and still growing significantly. 73.8% of mobile phone users will have smartphones.”

The Maryland Lottery has seen the same explosion when analyzing website session trends

to mdlottery.com by device category.

Website sessions have significantly shifted from Desktop to Mobile over the last 5 years.

Identifying this trend early has allowed the Maryland Lottery to refine its digital presence

by making mdlottery.com easier to use across all devices.

Additionally, according to eMarketer, “92.9% of US smartphone users will download apps

this year.” The Maryland Lottery has developed four apps, available on iOS and Android, focused

on targeted audiences with targeted functionality.

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E-commerce (internet Sales)

For most retail chains in the US, online business accounts for an immaterial portion of

sales. “Currently, the direct-to-consumer channel accounts for less than 3% of Wal-Mart’s,

Target’s and Bed Bath & Beyond’s revenues.”1

According to a survey conducted by Retail Systems Research in June 2013, around 84% of

the retailers polled worldwide believed that creating a consistent customer experience across

channels was very important. Moreover, omnichannel shoppers have a tendency to spend more

than regular shoppers do as they have access to a wider product range and additional discounts.

Therefore, investing in omnichannel retailing is quite essential for U.S. retailers.

“Additionally, nearly 1 in 5 people surveyed said they would spend at least 25% more at

their favorite retailer when [making purchases] over more than one sales channel.”2

1 http://www.forbes.com/sites/greatspeculations/2015/02/12/why-is-omni-channel-retailing-so-important-

for-bed-bath-beyond/ 2 http://www.options-mailorder.co.uk/images/images/Multi%20Channel%20Retailing%20Infographic.jpg

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Internet lottery sales have been a highly debated topic. In particular, retailers view

internet sales as an industry innovation that will negatively impact their earning potential and

will draw customers away from brick-and-mortar locations. This notion has been disproved, after

more than 12 years of e-commerce lottery sales by the UK National Lottery and many other

European countries.

The UK National Lottery introduced internet sales in 2003 and is a relevant case study of

the possible impact on overall Lottery revenues and retailer sales. The internet sales channel has

been cited as a key reason for the Lottery’s solid sales growth since that time. Total sales have

grown from £4.6 billion in 2003 to £7.1 billion in 2014. In 2014, internet sales exceeded £1.2

billion, or 17% of total sales.

More importantly, during the same time period, retailer commissions (a proxy for retail

sales) grew from £229 million in 2003 to more than £333 in 2014, a 45% increase. This reflects

continued growth in sales of Lottery games at traditional retailer outlets, even while the UK

National Lottery was building its internet sales channel.

Internet sales in the U.S. may have a short history, but it has provided a wealth of data to

states considering implementation. Five US lotteries—Illinois, Minnesota, Delaware, Georgia,

and Michigan—have made investments into and launched internet sales. Through FY 2014, none

of them is experiencing sales levels that eclipse those of other retail categories or that of the case

example from the UK. However, political pressure in Minnesota caused its lottery to cancel its

internet sales program.

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Michigan Lottery is trending towards becoming the industry leader with an internet sales

product portfolio that includes Electronic Instants Tickets (e-Instants) and Keno. *(The Michigan

Lottery’s Fiscal Year begins on October 1, so this number only accounts for two months of their

Fiscal Year numbers, as reported by La Fleur’s.) Since the introduction of internet sales in August

2014, the platform has grown to account for 4% of overall sales (50 weeks of total sales as of July

26, 2015).

Although sales for internet lottery have seen promising growth, it is the omnichannel

approach that has benefited the Michigan Lottery most. Similar to the UK, offline sales for the

scratch-off product category were up 10%, while the Keno product category was up 5%, during

the same 50-week sales period.

Michigan anticipates adding draw games to its internet sales product portfolio by the end

of calendar year 2015 to even further its omnichannel approach.

As we learn more from case studies from other states and countries, it is clear that the

revenue potential for internet Lottery sales is linear with the prize payout percentage of the

game. This means that the greater the payout, the greater the opportunity for sales and revenue.

For lottery sales, this suggests that draw games, with lower payouts roughly in the 50% range,

have much less sales potential than e-Instants (at 75%+), with casino-type games (90%+) having

the highest revenue potential.

This trend can be seen through the online gaming program in New Jersey, which was

launched in November 2013. In 2014, New Jersey casinos averaged $10,239,733 total gaming win

and have seen steady growth due to the payout structure of the games being offered.

Although product mix and sales vary from state to state, platform characteristics remain

consistent. Introducing internet Lottery sales on PCs and mobile devices is essential to the success

of an omnichannel approach that offers the same level of convenience and experience

consumers have grown accustomed to in other retailer categories.

Players will have the opportunity to sign up for an account, fund their digital wallet,

browse and purchase games and subscriptions, track transactions and play history, claim

winnings and more, all within a platform that institutes responsible gambling safeguards such as

identity, geography, and age verification. The platform will only allow consumers to purchase

games if they have had their identity and age verified, and are physically located with the state

of Maryland.

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Developing an internet sales platform to sell lottery games presents a new level of

challenges regarding player verification and responsible gambling. Two areas that have

generated the most concern from those opposing e-commerce are identity/age verification and

geographic verification. In both instances, procuring secure, trusted software with embedded

security features will enable the Lottery to ensure the agency is providing products only to those

individuals who comply with Lottery rules and regulations.

Identity Management, Geo-location & Age Verification

A number of industries in the U.S. successfully deploy identity management and age

verification in their day-to-day business practices. For example, the U.S. banking industry, by law,

must accurately verify the identity (including age) of each applicant when issuing certain types of

accounts. Today, a consumer can open a bank account online, and the full identity

management/age verification process occurs automatically in real-time. In order to implement

the identity management/age verification feature, a lottery will collect customer information

such as a player’s name, address, and last four digits of their social security number. These data

points will be quickly cross-referenced against multiple data sources while adhering to the

guidelines set forth in the Children’s Online Privacy Act (COPA). Age-verification software is

designed to detect and deter the activity of underage online consumers. Similar technology is

currently in use in the U.S. by retailers that sell age-restricted products such as alcohol and

tobacco.

An internet sales platform will also include geolocation technology in order to monitor

the geographic point-of-origin for all internet purchases and to confirm that lottery products are

only being sold within the borders of a particular state.

For PC initiated purchases the internet sales platform will be able to identify the

geographic location of players through their internet protocol (IP) address, which is a numerical

label assigned to that specific electronic device when accessing the internet. If a player’s IP

address is not identified as being within a state’s boundaries, the player will not be able to

complete the transaction. This technique is not without its limitations. Sensitivities towards the

issue can lead to over-blocking IP’s around geographic borders causing customer service issues.

As a secondary geolocation feature, the system monitors transactions and their response

times. When the platform detects a discrepancy with a player’s transaction time versus the

average response time of all of the approved purchases within the state, the transaction will be

halted and the player will be requested to contact customer service for verification. This

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secondary feature will be implemented to detect players with variable IP addresses that change

for various reasons.

For mobile device purchases, internet sales platforms use a technique called geofencing

to locate the player at the time the transaction is initiated. Geofencing is able to pinpoint the

location of a smartphone by tracking the phone’s unique Cell ID and then triangulating on the

phone’s actual location based on location of the closest cell towers. The phone’s location is then

further validated through tracking of the GPS installed in the smartphone device. This technique

is the strongest of those available. Taking into consideration the consumer shift to mobile,

implementing states have seen significant portion of the geographic verification come through

mobile.