Lottery duopoly
Two companies dominate the US lottery industry, according to a recent New York Times article ("Divide and Conquer: Meet the Lottery Titans", 10/21/07). Those two firms are Scientific Games Corporation and Gtech, and they provide technology and services to the plethora of state lotteries in the US, lotteries that generate over $200 billion in income.
And the two companies, having split the industry between them, are now starting to spread their operations worldwide. In fact, Gtech last year was acquired by Italian gambling and lottery giant Lottomatica. A Gtech exec is quotes as projecting "that over the next five years, nearly half of its sales will come from overseas, compared with 35 percent today."
Scientific Games has also spent over $200 million in the last few years buying foreign companies in the lottery business in an attempt to ease its global push. In 2007, for example, they bought Oberthur Gaming Technologies, a lottery ticket company with operations in Canada, Australia, and the US. The company also in 2007 bought 50% of Guard Libang, a Chinese lottery service company.
The two companies do everything from printing lottery tickets and rub-off cards to ruining the computer systems that pick winners, along with devising games and installing equipment for merchants.
As the Times article puts it:
Over the last three decades, Gtech and Scientific Games have jointly generated several billion dollars in revenue as vendors to lotteries - a business that flourishes at the crossroads of capitalism and public policy. In the process, the companies have steadily - and often controversially - evolved from minor suppliers into an influential oligopoly with a hammerlock on lottery operations.
The article explores the often distasteful power these companies have. Whenever you mix big money and politics, you get problems. But when politicians and states become so dependent on a pair of companies who control one of the major income sources, the dirty money will inevitably flow. And with that comes power. As one former state lottery director notes, "The vendors wield a tremendous amount of influence over the lotteries. Not a decision is made that they don't have some say in."
In addition, the companies are heavily involved in lobbying lotteryless stakes to join the fun" and in having lottery states expand their operations. The Times story notes that "Scientific Games alone helped draft legislation or finance initiatives that led to the creation of lotteries in California, Arizona, North Carolina, South Carolina, Colorado and Oregon, according to published reports and interviews with former legislators and staff members."
They even get to draft the lottery legislation at the state level, giving their companies advantages over smaller companies. Both companies have been involved in a number of clear cases of gross conflict of interests. The Times publishes a litany of convictions and investigations aimed at the two companies.
No the same pattern is happening internationally. Gtech employees have been charged with attempting bribe officials in Brazil, though Gtech declares it was a blackmail scheme against them.
Another pattern noticed by experts is lack of innovation, typical of tight oligopolies. That partly explains why lottery receipts are stagnant in the US. One expert is quoted as saying that "You don't have that much innovation as far as games and marketing goes because two companies dominate the field."
The article illustrates many of the principles of oligopolies we have talked about. Oligopolies grow to have influence over public policy t their profit. They keep building in one industry and make it difficult for smaller competitors. They end up determining what the product is, rather than the buyer of their products. They stop innovating. And they expand globally when the home market gets maxed out. All typical.
