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Lotteries just the ticket in economic downturn; Sales holding steady even as other forms of gambling begin to wilt

'I have been in this business for close to 30 years and I have never seen it this exciting and this good, despite the supposedly horrible economic environment.' Lorne Weil, Scientific Games

Las Vegas and other U.S. gambling destinations from riverboats to racetracks may be taking a beating from high gas prices, soaring airfares and the general economic malaise. But state lotteries are doing just fine as Americans continue to shell out billions of dollars a month for their shot at prizes large and small.

With numbers games and scratch tickets expanding globally, the firms that run and/or supply lotteries are in line to prosper even as the casino titans go through rough times.

Few are as well positioned to profit as Scientific Games Corp., the New York-based provider of lottery and racing services, which has been growing by leaps and bounds on the back of the trend. The company cracked the $1 billion revenue mark in 2007, up nearly 50% in just four years, steadily winning contracts both in the United States and around the world.

"We are on a roll," said Lorne Weil, the company's chief executive. "I have been in this business for close to 30 years and I have never seen it this exciting and this good, despite the supposedly horrible economic environment."

Scientific Games, he said, "has never seen any significant impact of a weak economy on lottery sales either in the U.S. or the major foreign jurisdictions where we operate."

With good reason: Unlike a pricey trip to Vegas or even a $100 day at the races, the lottery is a very cheap date -- and one that can be done in the course of one's day-to-day routine.

"Despite what [some press accounts] lead you to believe, lottery accounts for a very small percentage of household budgets, with the average player buying only three to four tickets a week," according to Weil.

Further, as the recession tightens its grip, cash-strapped states are looking for ways to fill the public coffers that do not involve the pain -- and political risk -- of raising taxes. Lotteries long have been seen as one such method, and bad times only bring more games, more ads and more marketing bells and whistles.

"States are now most apt to do the kinds of things that stimulate lottery sales to grow," Weil said, including increasing prize payouts and advertising spending. "More and more states will do this. We have seen it before in previous recessions. It is a much better alternative to raising taxes."

After a dip in the 1990s blamed largely on the expansion of casino gambling into multiple new jurisdictions, U.S. lottery sales have strongly rebounded. According to the North American Association of State and Provincial Lotteries, Americans spent $57.4 billion on lotteries in fiscal 2006, the latest year for which complete figures are available, generating just more than $17 billion in profit. Those are increases of 9% and 4%, respectively, from the prior year. (Oddly enough, in Canada, lottery sales experienced a precipitous drop over the same time frame, falling to $5.6 billion from $8.4 billion, according to the lottery association.)

It has begun to dip a bit this year, though, with revenue flat to down slightly at 23 state lotteries surveyed by the trade group, but rising in 20 others. Total lottery sales edged down fractionally to $15.2 billion. That compares with an estimated 10% drop last year in the pari-mutuel racing handle and a nearly 6% drop in gambling revenue on the Las Vegas strip through May this year.

More recently, Pennsylvania announced it sold a record $3.08 billion worth of lottery tickets in the year ended June 30, defying expectations of a drop.

"In these tough economic times, the Pennsylvania lottery had an extraordinary year," said Tom Wolf, the state's secretary of revenue. "Earlier this year, we were anticipating a decline in lottery-ticket sales. However, sales rebounded in the second half of the year and the lottery finished strong -- setting another all-time ticket sales record."

Ironically, the poorer people feel, the more likely they are to play -- at least according to one recent study. That could actually be fueling at least part of the boom.

Research from Carnegie Mellon University published in the July issue of the Journal of Behavioral Decision Making found that participants who were made to feel poor bought almost twice as many lottery tickets as a group that was made to feel more affluent.

"Some poor people see playing the lottery as their best opportunity for improving their financial situations, albeit wrongly so," said Emily Haisley, the study's lead author. "The hope of getting out of poverty encourages people to continue to buy tickets, even though their chances of stumbling upon a life-changing windfall are nearly impossibly slim, and buying lottery tickets in fact exacerbates the very poverty that purchasers are hoping to escape."

New York and Connecticut also were among a score of states reporting record sales in their latest financial statements, with the Empire State (the largest lottery market in the nation) raking in $7.2 billion, a gain of 5.5%.

As good as those domestic numbers are for companies like Scientific Games and competitors including Lottomatica (IT:LTO: news, chart, profile) and Intralot, Weil sees an even larger pot of gold overseas, especially in China where the introduction of instant tickets has been nothing less than a phenomenon.

"We have only been in business in China for three months and we already have an anticipated [sell] rate of 3 billion tickets this year," he said, adding that he eventually estimates annual sales in "the double-digit billions."

Scientific Games is currently flying in tickets made elsewhere as it gets its joint-venture factory up and running, hopefully by the end of this year.

Weil has high praises for the local regulatory regimen as well. Even though he is partnered with country's government-run Sports Lottery, which reports to the Department of Finance, "so far we have found them extremely easy to deal with, not bureaucratic in the slightest," he said. "They are not out there to create red tape. They get it."

Goldman Sachs analyst Betsy Gorton wrote in a note to investors that the "initial response to instant tickets in China has been stellar," and that there is plenty of room for growth.

"We believe the China lottery market to be underpenetrated and expect this market to turn into a huge opportunity for Scientific Games over the next few years," she said.

Driving factors could be an increase in the number of lottery-retail outlets -- just 150,000 for almost 1.3 billion people right now -- and the novelty and appeal of scratch games.

"Companies are already working on expanding their sales networks and introducing new games, which we believe will help in the rapid rise of lottery revenues in this market" according to Gorton. Instant tickets are also new to China and make up just 4% of total lottery revenues vs. 55% in the United States, she noted, and "have galvanized the lottery markets in Italy and France on their introduction."

Shares of Scientific Games, which is set to report its quarterly numbers after the close of trading Thursday, have been strong this year. While it fell from $40 and change in October 2007 to a low of $15.87 in January after losing a big contract, it has since rebounded nicely and is trading at just under $30.

Source: MarketWatch, By William Spain, July 29, 2008