Gtech eyes national lottery hoping its competition numbers come up

Where better to launch a bid for the State’s lottery business than from inside its Dublin headquarters?

Italian-owned gaming giant Gtech runs its Irish operation from the second floor of the National Lottery building on Lower Abbey Street. Its 70 staff are hemmed in on all sides by lottery personnel.

The location reflects its long-standing ties with the business. As technology supplier, it provides the network of ticket terminals in shops.

These living arrangements may need to be reconfigured, however, if Gtech wins the new 20-year licence to operate the franchise. The company is the first big international player to come out as a confirmed participant in the forthcoming competition process.

The man in charge of its bid is Derry- born Declan Harkin. Back in the 1990s, when the company operated mainly as a gaming technology supplier, he ran the Irish office. Since then, the Queen's University graduate has risen through the ranks to become senior vice-president and chief operations officer for Europe, Africa and the Asia-Pacific region.

At the same time, the company has mushroomed into a vast gaming empire, outgrowing its original incarnation as a technology supplier to become a major global operator in tandem, or as Harkin calls it, “a vertically integrated lottery organisation”.

“Gtech is a company that has been at the forefront of the lottery industry for over 30 years. Lottery is our DNA. Growing this sector, finding the right products, optimising for good causes and working with our customers responsibly is what we’re about.”

Harkin lists off the company's big contracts in Europe, North America and Latin America; an impressive stable of businesses that includes Italy, Colombia, Indiana and recently Illinois, which last year recorded an 18 per cent jump in sales.

He's keen to advance the company's pedigree as an operator, conscious that some in Ireland still view it as a technology outfit. To this end, he produces figures showing revenue from its operations division accounted for the majority share of its €3.1 billion turnover for 2012.

'Deliberately understated'
"Our presence in Ireland has been deliberately understated up to now because that was appropriate for a technology supplier, but this opportunity requires a different presentation of ourselves."

Since Minister for Public Expenditure and Reform Brendan Howlin announced his intention to seek an upfront payment for the licence there has been speculation that Gtech would join forces with the current lottery operator, An Post, because of its existing partnership.

The State company needs a suitor with the financial clout of Gtech if it wishes to retain the licence, while the latter is known to favour the idea of having an established, local brand on the ground.

“Obviously, working together is something I’d like to think both companies would continue to consider very strongly. So that’s a possibility we’re exploring but that’s all I can say for now,” Harkin says. He says the company has the resources to go it alone if required.

It’s hard to know what to read into this.

Are both entities strategically delaying the announcement of an alliance or has tying the knot proven more problematic than anticipated?

According to figures from the World Lottery Association, the global industry was worth $122 billion in 2012, accounting for 28 per cent of all gambling or gaming revenue. Despite the deteriorating global economic conditions, the sector grew by 7.7 per cent in 2012 and by 13.1 per cent the previous year.

“Without seeing the terms of licence, I anticipate the Government will not just be interested in the upfront payment but also the care and attention to the operation ongoing,” says Harkin.

He says lotteries around the world are measured on their contributions to good causes.

“The key question is whether growth here going forward can provide for an upfront payment as well as funding for good causes.

“We think the answer is yes. All major indicators forecast green shoots for Ireland. While lottery sales are down, when you factor what has happened to disposable income, the business has weathered the recession significantly better than others.”

Italian gaming group Lottomatica bought Gtech for $4.7 billion in 2006, forming the biggest lottery and gaming business in the world.

Earlier this year, the Italian group took the unusual step of rebranding itself as Gtech in recognition of its subsidiary’s strong global brand.

But what would the Gtech brand bring to the business here?

Consumers can expect “a very significant refresh of the technology used to support the business”, says Harkin.

He also hints there is likely to be a roll-out of new self-service points of sale in shops, which have proved popular in other countries.

Harkin declines to elaborate, saying the company’s technology offering will form a key part of its pitch for business, which would not be advantageous to divulge at this stage. Nonetheless, he says one of the key selling points is the untapped online market, which accounts for only 2 per cent of sales, well below the European average.

In Finland, for example, 35 per cent of sales now come via the internet channel, though the Finnish authorities allow for sports betting on their national lotto site, which is unlikely to be the case here.

Until now, the National Lottery has been curtailed in how it can trade online, obliging players to go through a cumbersome registration process most participants do not follow through to the end.

Under the new Lottery Act, the rules governing online sales will be relaxed to allow the next incumbent to grow the business online.

“The operator has never been able to fully leverage the opportunities that exist in the online channel because of the registration process. We certainly see great opportunities in this area,” Harkin says.

Gtech’s Illinois operation recently became the first US state lottery to begin trading online, offering players direct deposit accounts and subscriptions for automatic wagers.

Harkin tempers suggestions of an internet sales bonanza, however, insisting online growth will be gradual and that retail remains “the backbone of the business”.

He is also keen to allay retailers’ fears that the age of the internet will usher in a downturn in their trade.

“In all the jurisdictions we work in, developing the internet has not been detrimental to other trade styles. We see a rising tide for all boats; internet as well as retail.”

Lottery operators are typically keen to draw a distinction between what they do, namely gaming, and its more socially destructive cousin, gambling. Addiction experts say this distinction is spurious.

Opening up the online channel poses far greater risks to player safeguards than the retail model ever did.

Harkin insists, however, that Gtech is at the forefront of developing technology moderators to ensure that age-verification and play-limit criteria are adhered to.

He does not envisage the proposed lottery regulator having an automatic right of refusal on new products, and he expects eligible game categories to be specified in the terms of the licence.

“Typically, in other jurisdictions, there are certain game categories which are not within the remit of the licence, like poker-type games, and we expect to see the same here.”

There is a global trend towards toward outsourcing state lotteries to private operators, most notably in the US, where four high-profile state lotteries recently contracted out their operations to private managers. Harkin believes this reflects the maturing of the industry “to a stage whereby state authorities are looking to private enterprise to take the business to the next level”.

Gtech won three US contracts: Indiana, Illinois and, last month, New Jersey, where it was declared indicative winner. Ireland appears to be next on its wish list.