Report on Proposed Platform and Regulatory Structure for Online Lottery Sales

As required by the 2012 Joint Chairmen’s Report

Page 25

By

State Lottery Agency

September 19, 2012

Contents Introduction .................................................................................................................................................. 3

Platform and Devices .................................................................................................................................... 3

Funding ......................................................................................................................................................... 5

Products ........................................................................................................................................................ 5

Claims .......................................................................................................................................................... 11

Customer Service ........................................................................................................................................ 11

Retailer Involvement ................................................................................................................................... 11

Player Verification and Responsible Gambling ........................................................................................... 13

Conclusion ................................................................................................................................................... 15

Introduction Language on page twenty-five of the 2012 Joint Chairmen’s Report requires the State Lottery Agency (SLA) to report on the Proposed Platform and Regulatory Structure for Online Lottery Sales, including efforts to incorporate existing lottery retailers, and report to the budget committees by December 15, 2012. The SLA’s objective is to provide an e-commerce platform, also known within the Lottery industry as iLottery, to give consumers the option to purchase traditional lottery games through personal computer’s (PC) and mobile devices. By doing so the SLA will be able to capitalize on evolving consumer behaviors while broadening its player reach in an effort to remain competitive in today’s retail landscape. This strategy will allow e-commerce to complement the well-established brick-and-mortar locations as described in the 2011 Joint Chairmen’s Report on the SLA’s plans for Online Sales of Traditional Lottery Games1. It may be helpful to note that iLottery is distinctly different than iGaming. iLottery pertains to the purchase of traditional lottery products on the Internet whereas iGaming involves playing of traditional casino games on the Internet. iLottery is one of the most important initiatives for the SLA. Today, consumers are choosing the Internet in addition to traditional retail operations to make their purchase. Virtually every consumer industry understands that their customers and future customers are online so that it is now mandatory for them to build Internet-based sales channels. Worldwide, iLottery is becoming a common practice in the industry. It is popular with lottery consumers because they now have the option to purchase lottery products in a manner that is more consistent with current lifestyle trends. It is also embraced by lottery retailers because iLottery is proven to have a direct, positive impact on sales that occur in traditional retail outlets as new players who are attracted by the opportunity to play online also become new lottery consumers at brick & mortar retailers. Here in the United States numerous lotteries are moving ahead with iLottery platform. Today at least four lotteries allow players to make lottery purchases over the Internet channel. Lotteries in New York, Minnesota and North Dakota all offer players the ability to buy lottery subscription on their respective websites. The Illinois Lottery offers sale of both subscriptions and same-day purchases on their website. Lotteries in Delaware, Georgia and North Carolina have all announced plans to launch similar platforms.

Platform and Devices Introducing iLottery on PCs and mobile devices is essential to the success of this new business model as it offers the same level of convenience and experience consumers have grown accustomed to in other retail categories.

1 State Lottery Agency, “Report on Plans for Online Sales of Traditional Lottery Games,” December 15, 2011.

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 verified. Additionally, it will be required that all players be 18 years of age or older and be physically located in the state of Maryland. Within a completely secure environment, all players will be required to complete an iLottery account profile including:

Name

Address

Last four digits of social security number

Date of birth

E-mail address

Phone number

Mobile number

User name

Password SLA envisions that a player’s account profile will be the foundation for his or her experience. The account profile will give players the ability to log in to their account from any supported PC browser or mobile device with their user name and password. Additionally, the information submitted will be utilized to confirm the identity and age of the player. The information will also provide key information and complete history for customer relationship management purposes. The platform will include essential e-commerce characteristics2 that will translate from today’s ecommerce experience to an iLottery platform. Some of these characteristics include:

Easy navigation

Consumer shopping cart

Easy checkout

Showcase most popular products

Promote related products

Effective, accurate product demos and photos

Related product information and specifications

Effective site-wide search

Easy to find customer resource tools

Secure and trusted site

2 Vandelay Design, “9 Characteristics of Well-Designed E-Commerce Websites," July 29, 2009, accessed July 17,

2012.

Funding SLA foresees that the player’s first step before participating in iLottery program is funding his or her digital wallet or e-wallet. Functioning very similar to a physical wallet, a player’s e-wallet will allow for a convenient way to store funds and use them to make iLottery purchases. There are three primary ways iLottery players will be able to fund their e-wallet: automated clearing house, debit card and iLottery vouchers. Automated Clearing House (ACH) transfer will allow players to send funds directly to their e-wallet. The transfer would take place when a receiver (e.g. Lottery) authorizes an originator (e.g. Player) to issue an ACH debit to their e-wallet account. Accounts are identified by the bank’s routing number and the account number within that bank. This process can take up to 48 hours to complete. An alternative option is a debit card transfer. This option works similarly to ACH, but with several distinct advantages. The amount transferred is deducted directly from the player’s traditional checking account, while adding in a greater level of convenience to the player, as well as added security protections. Most importantly, it creates a greater level of usability among players who are accustomed to using this type of payment method on other e-commerce transactions. The SLA predicts that funds will be readily available in the player’s e-wallet in real time. Lastly, players will be given the ability to buy iLottery vouchers at more than 4,200 Maryland Lottery retailers throughout the state. Vouchers will be made available in varying denominations. Players will be given a voucher ticket with a bar code that can be deposited into their e-wallet.

Products The goal is to offer interesting products at different price points that appeal to a variety of demographics. The SLA expects to provide products that are unique to the Lottery and do not alienate other gaming options within the state. To accomplish this goal, the SLA intends to introduce iLottery utilizing our four categories of games: draw, monitor, instant and subscription. The timeline of when each game within a given category will be launched shall be determined as iLottery becomes operational. Draw games that are being considered include Pick 3 and Pick 4, Bonus Match 5, Multi-Match, Mega Millions, Powerball and 5 Card Cash. Scheduled to launch at traditional brick-and-mortar Lottery retailers in November 2012, 5 Card Cash is a new product that offers two ways to win: an instant win or a draw win. Monitor games include Keno and Racetrax. The SLA predicts that the player experience with monitor games in brick-and-mortar locations will not translate to the online environment. The SLA is evaluating creative ways to introduce monitor games online that will help educate players on how to play these game categories. The SLA believes that giving players the ability to teach themselves how to play these games in the comfort of their own home will encourage them to translate those experiences and play at traditional brick-and-mortar establishments.

Electronic Instant Tickets (EIT) are also being evaluated. Much like traditional scratch-offs, the SLA proposes that these games include a variety of themes, interactivity levels and length of play. Currently, two EIT models are under consideration. The SLA believes each model is consistent with current traditional instant products. The first model is point-and-scratch, and the second is point-and-click. The results for each model will be predetermined using the exact same pooling methodology that the SLA currently uses for paper-based instant tickets. This ensures the SLA’s ability to apply the exact same security and accounting standards to this new format. Also, this provides the option to offer hybrid tickets, where the prize pool of a designated game is proportionately allocated between paper-based instant tickets and similarly themed electronic tickets. Point-and-Scratch The game play experience for this type of product is similar to traditional scratch-offs. The only difference is players use their mouse to reveal game play information that is typically underneath latex on printed tickets. Point-and-Click The game play experience for this type of product is slightly different as players are required to point-and-click different areas of the game to reveal the game information. These tickets offer a slightly higher level of interactivity with custom animation and music.

Examples3 for each game type can be seen below:

3 Scientific Games, “iLottery Demo Games - $3,000,000 Bonanza and Diamond Mine,” accessed August 2012.

POINT-AND-SCRATCH

GAME NAME

$3,000,000 Bonanza is a number match game.

GAME INSTRUCTIONS

Match any of YOUR NUMBERS to any of the WINNING NUMBERS to win the PRIZE shown. Reveal a “coin” symbol to win the prize shown automatically.

Reveal a “5x” symbol to win 5 times the prize shown. Reveal a “10x” symbol to win 10 times the prize shown.

Game instructions are consistent with current traditional instant products.

GAME PLAY

Players point-and-scratch the virtual latex to reveal the game information and associated prizes.

GAME FINISHES

After a player reveals the game information, they are greeted with a message informing them if they’ve won or lost. In this example the player wins $20 with a 10x multiplier for a total sum of $200.

POINT-AND-CLICK

GAME NAME

Diamond Mine is a jewel collect game.

GAME INSTRUCTIONS

Click on one of three carts shown to reveal jewels Jewels found will be placed in four Diamond images that match those within the image.

If all the jewels are collected on the same HORIZONTAL line in any Diamond image, a prize is won for that same line. Game outcomes are consistent with current traditional instant products

Game instructions are consistent with current traditional instant products.

GAME PLAY

Player’s point-and-click the mine carts to reveal jewels.

GAME FINISHES

After a player reveals all jewels, they are greeted with a message informing them if they’ve won or lost. In this example the player wins $6.

Long-term subscription plans will be made available for draw games and will be evaluated for additional opportunities. Subscriptions are an automatic way for players to set up their play online for their favorite games. The SLA conceptualizes that players will have the opportunity to purchase subscriptions for 13, 26 and 52 weeks so they don’t miss any drawings for games of their choice.

Claims The SLA envisions that claiming procedures will not drastically change. A player with a winning ticket for prize winnings of up to $600 still will be able to claim that winning ticket at any Maryland Lottery retailer throughout the state. As a new feature to the claims process, the SLA plans to offer players the ability to transfer their prize winnings up to $600 directly into their e-wallet and to continue purchasing Lottery games. Claiming individual prizes between $601 and $5,000 will not change. Players may claim their prize winnings at any Maryland Lottery Agent Plus location or one of the SLA’s Customer Resource Centers. A winning ticket with prize winnings of $5,001 or more must be claimed at Maryland Lottery Customer Resource Centers in Baltimore or Lanham, MD. To claim prizes of $601 or greater, players will be prompted to print out a prize barcode or present the prize barcode through their mobile device to the Agent Plus retailer. When claiming a winning ticket above $600, players still will be required to present proof of their social security number and a photo ID indicating they are at least 18 years of age.

Customer Service Continuing and maintaining a solid brand reputation is as important as the platform itself. The SLA plans to implement a customer service team that will operate 24/7/365 to handle any questions and concerns related to iLottery in an organized and efficient manner. Players will be able connect to a customer service representative via phone, engage in a live chat, connect through social media, or by sending an e-mail. These services will be included within the vendor contract associated with the development of the iLottery website.

Retailer Involvement Obtaining retailer input has been an important step in the SLA’s process to determine the viability of iLottery. To gain feedback from the retailer community, the SLA held two town hall meetings with retailers on May 17 and June 14, 2012 at the Maryland Lottery headquarters in Baltimore, MD. These meetings gave the SLA the opportunity to share its vision for iLottery, as well as answer any additional questions and

concerns from attendees. Retailer involvement and feedback will continue to be instrumental to business decisions as the agency moves towards development of the platform. In order to put the iLottery program into effect, new regulations will be promulgated. The SLA remains committed to its retailer network and will introduce an iLottery platform that is seamlessly integrated to feature both sales channels. The SLA understands that iLottery will not be a successful business model without retailer involvement as part of the overall strategy. The SLA is confident that the retail community will benefit from the program in a number of ways. First, the SLA expects the retailer community to benefit from an increase in direct sales growth that will come from new players who are introduced to lottery games by the opportunity to purchase games online and then also become new lottery consumers at brick & mortar retailers. This is the common outcome in markets around the world where iLottery has been implemented. Further, implementing cross channel marketing techniques to create a 360° degree playing cycle will be an integral component to iLottery. As shown below, once a player registers to participate, the 360° degree cycle begins. Marketing techniques will be used to encourage players to participate online and at brick-and-mortar locations.

Implementing marketing and sales strategies such as e-coupons, promo codes, mobile apps, daily deals, social gaming, promotional overlays and player loyalty programs can accomplish an integrated approach. This approach drives traffic to retailers, which not only increases lottery participation and

sales, but also increases sales of the retailers’ other products. The SLA predicts that its collaboration with brick-and-mortar retailers will assist in launching creative marketing concepts that will help both sales funnels thrive and prosper. To compensate retailers for their involvement in the 360° degree sales cycle, as well as their total sales of traditional Lottery products, the SLA proposes a new, pooled iLottery commission structure. This new commission structure will be based solely on each retailer’s current Lottery sales within a given zip code. Essentially, retailers that sell more traditional products within their establishment will receive a greater piece of the iLottery revenue. For example, in the sample case below, since Retailer F sold 37.47% of total traditional Lottery sales within zip code 20000, it will receive the largest percentage of iLottery commissions for that sales week.

Retailer Name Zip Code B&M Sales w/o 7/2

% of B&M Sales By

Zip Code

Commission on

$10,000 in iLottery

Retailer A 20000 580.00$ 0.58% 2.90$

Retailer B 20000 1,750.00$ 1.75% 8.75$

Retailer C 20000 7,800.00$ 7.80% 39.00$

Retailer D 20000 25,150.00$ 25.15% 125.75$

Retailer E 20000 27,250.00$ 27.25% 136.25$

Retailer F 20000 37,470.00$ 37.47% 187.35$

100,000.00$ 500.00$

500

Player Verification and Responsible Gambling Developing an e-commerce platform to sell Lottery games online understandably presents a certain level of challenges regarding player verification and responsible gambling. Two areas that have generated the most concern from those opposing iLottery are age verification and geographical verification. Verification features will make sure players are 18 years or older and are within the state of Maryland during their transaction. In both instances, procuring secure software with embedded security features will enable the SLA to ensure the agency is providing products only to those individuals who comply with SLA rules and regulations. Identity Management & Age Verification A number of industries in the United States 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. The SLA plans to adopt the same techniques and practices as the U.S. banking industry when implementing its iLottery program. In order to implement the identity management/age verification feature, the SLA will collect customer information such as a player’s name, address, and last four digits of their social security number. These data points then will be quickly cross-

referenced against multiple data sources while adhering to the guidelines set forth in the Children Online Privacy Act (COPA). Age-verification software is designed to detect and deter the activity of under-age online consumers while implementing the same safeguards that are present at brick-and-mortar locations. Similar technology is currently in use in the United States by retailers that sell age-restricted products such as alcohol and tobacco. Geographical Verification The SLA will implement geolocation technology in order to monitor the geographical point-of-origin for all iLottery purchases and to confirm that Lottery products are only being sold within the borders of the state of Maryland. For PC initiated purchases the e-commerce 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 Maryland’s boundaries, the player will not be able to complete the transaction. As a secondary geolocation feature, the system will monitor 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 the SLA’s customer service provider. This secondary feature will be implemented to detect players with variable IP addresses that change for various reasons. For smart phone initiated purchases the e-commerce platform will 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. Responsible Gambling In addition to enforcing age and geographical verification, the SLA is committed to its on-going efforts to encourage and promote responsible gambling whether it is with its traditional lottery products, at its casino locations, or its online iLottery platform. Taking into consideration guidelines from the Internet Responsible Gambling Standards4 issued by the National Council on Problem Gambling, the SLA’s e-commerce platform will include a variety of resources, such as a link to the Maryland Alliance for Responsible Gambling, to ensure players are having a fun and positive experience. Players will be able to customize their playing experience by setting funding and time limits, marketing restrictions and more. Easy access to voluntary exclusion resources also will be available. The SLA operates a voluntary exclusion program (VEP) for individuals who wish to ban themselves from play. On

4 National Council on Problem Gambling, “Internet Responsible Gambling Standards”, April 23, 2012, accessed July

17, 2012.

the iLottery platform, VEP participants will be voluntarily excluded from purchasing and playing on the iLottery platform and will be removed from any subsequent mailing lists. Responsible gambling training also will be provided to the SLA’s customer service provider. The provider will be given the tools and procedures necessary to manage a problem gambling situation if they are made aware of the potential problem by the player.

Conclusion Introducing iLottery involves complex issues and processes. However, the SLA maintains that these complexities can be overcome with the proper resources as well as short and long-term planning including product development, marketing, sales, and communications efforts. Further, the SLA fully appreciates the ongoing importance of our traditional retailer community. With this in mind, our plan has been designed in a fashion that ensures their continued support. SLA will continue to seek comments from the retailer community and host town hall meetings with retailers to answer any questions and concerns about the iLottery platform. Just as it took the agency’s traditional games time to reach peak revenue goals, the SLA suggests that it, too, will take time for the iLottery platform to mature into a robust program. However, in time, by expanding the Lottery sales channels to include brick-and-mortar retailers and an iLottery platform, it will help protect the SLA from “near-term erosion and long-term obsolescence, while reaching a new player segment.”5

5 Sciplay, “Lottery Games and the Internet: Leveraging an Online Sales Channel to Grow Sales Responsibly,”

February 2011