PA Lottery spokesman Jeffrey A. Johnson recently said the Lottery is projecting $250 million in new profits from online lottery sales over the next five years.
That works out to an average profit of $50 million per year. A number some analysts think is out of reach. But a careful reading of online lottery numbers in other states indicates $250 million in five years is not only possible, it’s quite likely.
Be like Michigan
Whether or not Pennsylvania can reach its $250 million target will depend on a number of factors. Not least of which is what current states online lottery it tries to emulate.
The gold standard when it comes to revenue and profit is the Michigan online lottery.
The Wolverine State is one of four states that sells a variety of lottery products online – in addition to those four, five other states offer online subscription services.
Of all the online lottery states, Michigan is far and away the best performer, even though it’s not the most populous. That honor belongs to Illinois.
Michigan’s online lottery launched in 2014, and over the last three years it’s generated:
- $18.5 million in net online profit in FY2014-2015 off of $ 146,189,761 in sales.
- $48 million in net online profit in FY2015-2016 off of $384,992,537 in sales.
- $97 million in net online profit in FY2016-2017 (sales numbers have yet to be reported).
That works out to $54.5 million annually.
That’s a good sign for Pennsylvania, considering:
- Pennsylvania has a larger population than Michigan. Pennsylvania’s population is around 13 million compared to Michigan’s population of 10 million.
- Pennsylvania and Michigan have similar median incomes ($51,000 in Michigan vs. $59,000 in Illinois) and lottery spend per capita ($221 in Illinois and $254 in Michigan).
Michigan also seems to be the model Pennsylvania used for its projections.
An October 2017 fiscal note drafted by the Pennsylvania Department of Revenue projected Year 1 profits of $25 million, which is in line with Michigan’s performance during its first full year with an adjustment upwards for their population.
Not like Illinois
Bigger doesn’t always equal better. On the flip side, there is Illinois.
Online lottery revenue in Illinois comes in at less than a third of Michigan’s. This is despite similar economic factors and Illinois’ significant population advantage.
The reasons Michigan’s online lottery outperforms Illinois are:
- Michigan offers a large assortment of products, including daily and weekly drawings, instant win games, and keno. Illinois only sells tickets to daily and weekly drawings online.
- Michigan offers a healthy return to player (RTP) of 87 percent, an almost unheard of number for lotteries). Because it only sells draw tickets, Illinois’ online RTP is around 50 percent – a typical amount for draw games.
- Michigan does a lot of marketing of its lottery and recently signed an agreement that will see Income Access take over its online lottery affiliate program. Illinois doesn’t aggressively market its online lottery.
Which path will PA choose?
There are reasons to be optimistic that Pennsylvania’s online lottery will look more like Michigan than Illinois.
- The PA online lottery will offer even more products than Michigan: draw games, instant win games, keno, and virtual sports.
- Keno and virtuals will also be made available on monitors in terrestrial lottery locations. Similar virtual racing games in Maryland were launched in 2006 and now account for nine percent ($180.4 million in 2017) of the Maryland Lottery’s total sales, according to reporting by Gambling Compliance.
- Based on the October 2017 fiscal note, the PA online lottery would offer a 78 percent RTP – The Department of Revenue projected iLottery sales of $86.3 million in Year 1, resulting in $19 million in profits. Instant win games should have an even higher RTP with draw and keno games pulling the average down to 78 percent.
- Pennsylvania has a proven model to follow in Michigan.
That said, there are also a couple of big unknowns in Pennsylvania.
- Pennsylvania will be the first iLottery state that has to compete with online gaming, although the state’s decision to tax online slots at 54 percent could work in the lottery’s favor. Reason being, online instant win games resemble online slots and will likely have similar RTP.
- It’s unclear how much marketing support the online lottery will receive, or if Pennsylvania will turn its affiliate program over to a company like Income Access.
Either of these factors is capable of dragging the industry down.
Assuming the two unknowns don’t manifest as problems, Pennsylvania should have no problem reaching its five-year goal of $250 million.
There’s also a realistic chance that the two unknowns become assets, and Pennsylvania’s online lottery outperforms its own projections.
How online gambling will interact with online lottery in the US isn’t clear, but based on performances in jurisdictions that offer both, the two customer bases don’t have a tremendous amount of overlap. Instead of competitors fighting for the same customers’ dollars, online casino games, online poker, and online lottery could coexist or even have an additive effect due to raised awareness of the products. This may bridge any trust gap players might have about online gaming products.
If Pennsylvania partners with Income Access early it would accelerate customer awareness and increase revenue.