The rise, the fall, and the future of lottery

By April 6, 2017News

Lack of competition has stifled innovation in the lottery industry and as a result the lottery is failing to engage with younger generations.

As lottery seed investment specialists, we’re on the hunt for innovative ideas that have the potential to shake up the tired lottery industry. We’re looking for business ideas that millennials love and that have the potential to become huge. Essentially, we’re looking for businesses that can redefine traditional lottery for the better.

To understand what the future of lottery will look like, let’s start from the beginning:

Lottery 1.0: The first “enjoyable tax” transforms the world, then dies

2017_03_13_zis-understanding-of-lottery_chinese-dynasty_v1The power of lottery for good was first discovered in 200 BC when the Chinese Han Dynasty hit upon the idea of selling lottery tickets to help finance the Great Wall of China. A curious alchemy ensured that everyone won; normal Chinese citizens experienced the excitement of dreaming about winning life changing sums and society could afford to build a vital infrastructure project to protect the nation. Indeed, they may not have thought about it in this way but they had essentially invented gamified taxation – people voluntarily contributing money for use by society in exchange for participation in an enjoyable game.

Over the subsequent years this incredible invention went on to, amongst other things, power the Roman Empire, underwrite the discovery of the New World, and advance human knowledge through the formation of Harvard and Yale. But by the beginning of the 20th century an increasingly paternalistic moral environment, coupled with a number of high profile scams led to the widespread outlawing of lotteries.

For the next 50 years, lottery prohibition either stopped lottery entirely or drove play underground, to the benefit of no-one but the mob.

Lottery 2.0: Lottery rises again, but enjoyment takes a backseat

2017_03_13_zis-understanding-of-lottery_chartThis situation persisted until after the 2nd World War when the extreme pressures of post-war funding- needs coupled with a lack of appetite for tax increases slowly led to the re-legalisation of lotteries.

During the second half of the 20th century most nations re-established lotteries in a highly regulated and tightly controlled environment. This led to a reduction in fraudulent behaviour, and as consumer confidence soared so did lottery revenue. Indeed, by 2000 global lottery sales had surpassed $200bn a year; more than the music, games and cinema industries combined.

However, by 2010 it was clear that something was wrong. Whilst sales continued to rise globally, in mature markets the number of players started to fall. The crisis was most pronounced amongst young people. In Germany the millennial generation play 50% less lottery than previous young generations and similar patterns show up everywhere you look. So what is going wrong with the golden goose that is lottery?

To understand the current malaise, it is important to understand the way in which lottery is typically offered. In their eagerness to protect players from fraud and exploitation governments created highly protected monopoly lottery licences. As a condition for being able to offer such a lottery the operator (either state or private) has to contribute a high percentage of sales (20-30%) as either tax revenue or to good causes. In return they are protected from competition.

In such an environment there is very little incentive to innovate, and whilst lottery is pretty close to a timeless product, that taps into a timeless need, the technological shocks of this millennium have fundamentally changed the landscape. Operators that still, in 2017, run businesses that generate over 90% of sales offline are just not equipped to deal with the needs of the millennial generation. Like all good monopolists their response to market shocks is not to innovate and improve their product, but to lobby for further protections, and to shut down any potential competition.

Lottery 3.0: Putting the player first to benefit all

2017_03_13_zis-understanding-of-lottery_innovation_v1It is clear that slow, protective monopolies, and their slow, protective suppliers are not going to innovate in time to save lottery from irrelevance. But there is a better way.

The wider UK online gambling market provides inspiration. By allowing open competition, within a thoughtful regulatory framework, the UK benefits from lots of consumer choice and innovation, increased tax revenues, and a thriving, highly paid and creative source of jobs.

Imagine taking a similar approach to those games that we call lottery. Increased competition would spark innovation, finally clever start-up companies could build the products that technology natives crave, and tax revenues would be massively increased.

Until that happens lottery start-ups are already beginning to explore new business models that create products that do not classify as gambling, and are therefore not bound by the intricate web of national and international regulations. Our first investment, the Free Postcode Lottery, is an example of a lottery game that has removed the ‘pay to play’ element and is thus a prize competition or sweepstake and therefore not subject to lottery regulations. In this model revenue is generated through advertising alone.

But it is frustrating that start-ups have to take such an approach simply to deliver innovation and create games that millennials love. If we were to change the way that we regulate lottery, and open it up to competition, then we would eventually come full circle and this incredible force for total societal good that we call lottery could begin to meaningfully change the world again.

Does this sound like something you’re working on? If you’ve got a start-up with the potential to reshape lottery, we would love to hear from you.

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