Analysis: Is it time for the new dawn of lottery betting?

The competitive rivalry between digital lottery operators Zeal and Lottoland spiced up significantly in January after Lottoland made a late play to derail Zeal’s proposed takeover of German online lottery brokerage Lotto24.

Zeal agreed a deal in November 2018 to acquire Lotto24 in a strategic move to switch its German business model into a lottery broker rather than a lottery betting operator. The plan is for Zeal to sell tickets from local state lotteries instead of offering bets on the outcomes of draws to de-risk its business model as the case against lottery betting operators in Germany, and elsewhere, escalates.

Lottoland, however, does not see it that way. The firm’s CEO Nigel Birrell seized his opportunity as a minority shareholder in Zeal to publish an open letter to fellow shareholders. The letter cast doubt on the value of the acquisition and insisted it did not make financial sense for Zeal shareholders, while making the case for Lottoland to propose an alternative offer for Zeal’s Germany-facing lottery betting business.

Birrell followed through with a €76m move for Zeal’s lotto betting arm, although the offer was rejected, with Zeal CEO Dr Helmut Becker warning that any prospective deal for Lotto24 would be dead in the water if the firm’s Annual General Meeting, scheduled for 18 January, was delayed.

The meeting went ahead as planned and Zeal shareholders approved the acquisition. Becker declared Lottoland’s late bid “an attempt to buy our core German assets on the cheap” while Birrell pointed to the result of the shareholder vote as evidence that Lottoland had a case. Just 51% of shareholders voted to waive the requirement on Günther Group, which will own more than 30% of the combined group, to make a full takeover offer for Zeal.

“This highlights what we have expressed all along,” said Birrell following the vote. “The Lotto24 shareholders are the only ones that will benefit from this transaction; and that the transaction is value destroying for Zeal shareholders.”

Lottoland saw an opportunity to improve its business and weaken a competitor, but Birrell’s bone of contention remains that Zeal is relinquishing its lottery betting assets too early, with no clear sign from German regulators over if and when lottery betting might be outlawed in the market.

“A couple of people have told me they are surprised that Zeal has decided to go down the lottery messaging route at this stage before there is any clarity that [betting] won’t be allowed in the future,” says Birrell. “They are potentially giving up a good chunk of revenues to go for a lower margin operation – from our perspective that is premature.”

German inefficiency

The regulatory outlook in Germany is unclear at best. The Interstate Treaty is a phenomenally complicated piece of legislation and only Schleswig-Holstein, and more recently Hesse, appear receptive to furthering the case for a legitimate online gambling framework.

Lottoland has been prohibited from advertising on television in several states, while the Finance Minister in Hesse said in January that lottery betting is “currently prohibited and will be prohibited” under any new gambling regulation. Zeal will consider these updates as just cause for de-risking its Germany-facing business, but Birrell is still adamant they’ve moved too soon.

The word from ICE (where Birrell and Becker sat on a panel together about the future of lottery) was that there might be some regulation in place in Germany by 2021. Birrell says: “I have been in gaming since 2005 and the market hasn’t changed much. Nothing much has happened so the next two years probably isn’t a long time in terms of regulation.”

EGR Intel reached out to the Lower Saxony Ministry of Interior and Sports for an update on German gambling regulation to see what the future might hold for lottery betting. The response was clear as mud: “Please understand that – due to the negotiations concerning the future of the German gambling regulation, which currently take place on a political level – we‘re not in the position to give information or opinion on the future of German regulation, neither in general terms nor in detail.”

Regulation aside, the lottery vertical is in decline. State-run offline lotteries are struggling to engage new audiences and it is arguably the betting and gaming vertical most deeply-engrained in a retail environment. The lottery sector’s adaptation to today’s digital age has been reluctant and slow, and Birrell believes that banning digital-first competitors like Lottoland and Zeal from regulated markets will only delay that process even further.

“We are seeing a slow decline because there are no competitors,” says Birrell. “Why don’t they get rid of monopolies and allow competition? It is an important market for us and we said all along that we wanted to become a regulated and locally-licensed operator. We have made licence applications in Germany to challenge the regime and try and force a constructive dialogue, but without much engagement,” he adds.

Birrell insists that Lottoland would be happy to stop taking bets on German state lotteries to protect local revenues and the funds for good causes. But the Gibraltar-headquartered firm also touted this idea in the Australian market and regulators barely took notice of it before outlawing all betting on both domestic and overseas lotteries.

New arrivals

So with unclear or unfriendly regulation in the majority of core markets, is the industry’s interest in the lottery betting sector at an all-time low? No. Quite the opposite as it turns out – this year has seen two new lottery betting projects emerge. The first is the super-intuitive mobile-only Lottomart, which launched in the UK after being built by former Obodo CEO and bet365 director Ashley Lang.

Speaking to EGR, Lang said there is room in the lottery betting market for more competition. “There is a lot of further innovation we can bring to the table and new products that are based upon the same kind of consumer appeal [that our competitors have].”

One innovation enables players to boost their chances of winning in return for a lower share of the jackpot, an inverse of the sports betting app Kwiff. “My team’s rationale behind the boost was, if we give the customers that control, would they rethink that chance to be more likely to win, even if it’s a lower amount?” asked Lang. “We’re not confined by the structure of any foreign lottery draw and a boost allows us to differentiate and give the customers a choice.”

Serial egaming investor Optimizer Invest has also bought into the lottery betting vertical this year. The group’s newly-created Mega Lotto product is currently being built on the GiG Core solution after the angel investment group spotted a gap in the online lottery market.

“We have identified that lottery is one of the biggest markets out there that has not been challenged or disrupted and we estimate that the lottery market is probably still 96% offline based,” says Optimizer Invest CEO Petter Moldenius. “We think we can bring to the table something new and fresh to address that huge potential as consumers move away from the offline world to the online world.”

As with all lottery ventures, the biggest challenge will be persuading digitally woke millennials to sign up and deposit funds. Lottoland believes the answer to that conundrum is big and frequent jackpots (who under the age of 25 has time to wait for an actual draw to take place?) but Moldenius, like Lang, thinks the key to success is a truly mobile-first solution.

“We have the benefit now of starting on a blank piece of paper,” says Moldenius. “The other ones have started and have grown – Lottoland is huge and has big market share of the online space. Given that we start afresh, I think we can jumpstart ourselves into a friendlier mobile-first solution than those that we see in the market today. We can be unique,” he adds. Maybe Moldenius will hit the jackpot.