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Alchemy3 Featured in LIMA's Inside Licensing March Issue

State Lotteries Draw on Licensing to Spur Game Sales

This article orginally appeared in the March 1, 2016 issue of Inside Licensing

Licensing is a major attraction for state lotteries as they draw on the equity of TV shows, videogames, sports franchises, characters, board games and corporate brands to spur sales of instant and other games.

Licensed properties helped power a strong performance in instant ticket sales in lotteries around the U.S. in the year ended June 30, 2015, during which ticket sales increased 3% to $63.6 billion, according to La Fleur’s Magazine, which tracks the lottery business. 

A $3 billion licensed market
Instant tickets generated about $37 billion in revenue, with licensed versions accounting for 8-10% of that total, says Scientific Games’ Stephen Saferin, whose company is one of four major lottery ticket suppliers for the U.S. market, a list that also includes Alchemy3, Pollard Banknote and International Game Technology (IGT). That translates into better than a $3 billion market for the licensed segment.

Those ticket suppliers are the actual licensees, responsible for marketing the games to the state lottery boards, printing the tickets and, in some cases, sourcing additional prize merchandise. The lottery boards are responsible for staging and promoting the games. The most prolific distribution points, say industry executives, are generally convenience stores and gas stations.

Retail pricing of the tickets is fairly consistent. Licensed games generally start at $2 per ticket and can range as high as $20, with the largest percentage at the $5 price point. But lotteries often buy additional licensed products as prizes, many for so-called second-chance games in which non-winners of instant games can enter codes from their cards to take part in a second drawing.

IP owners are typically paid a 0.25% royalty on each ticket printed by the ticket suppliers based on the number printed. In addition, licensors get additional royalties from merchandise offered as prizes -- many for second-chance games. That merchandise may be bought from licensees –in which case the brand owner gets the normal royalty from the licensee – or sourced directly by the ticket supplier.

Exclusivity’s the rule
According to one agent whose company has done several lottery deals, virtually all are exclusive to a single ticket vendor. The reason: if a property is avail-able from more than one ticket company, most lottery boards are required by law to put out a formal RFP on tickets with that property. But if only one seller has Monopoly, for instance, there’s no possibility of competitive bidding.

The scope of the licensed games sometimes crosses state borders. In Florida, where many core players watch “Wheel of Fortune,” the state will join in a linked-game lottery across several states later this year with a chance for winners to appear on a non-broadcast version of the show in January 2017 to compete for a $1 million prize, says Florida Lottery’s Justin Rock.

As in the rest of licensing, the ticket companies and their lottery board clients use different IP to try to attract various player segments. “We like to have variety of brands because it really does vary by the state, what their objectives are and what their roll out plan is,” said Alchemy3’s Jeff Schweig. “Sometimes the objective is to stimulate more play amongst your core and other times you want a brand that attracts a younger adult player and potentially one that is more affluent.”

Some licensed games – Hasbro’s Monopoly is the prominent example -- have become perennials, being regularly rerun in a state, though not so of-ten as to seem “old” to consumers. But lottery suppliers and state agencies are in constant search of new brands to at-tract either a younger audience or appeal to a core base of older players:

  • Pollard’s licensing agreement with General Motors got an overhaul, as Pollard traded in a Cadillac license for a Corvette that will be featured in a Kentucky instant lottery that launches March 31 with two million tickets. General Motors shifted the Cadillac brand away from use in lotteries, replacing it in Pollard’s case with Corvette, says Pol-lard’s Sina Aiello.
  • Scientific Games has spread its Margaritaville license across instant lotteries in a dozen states, building an agreement with Jimmy Buffet’s company that also extends to its licensed slot machine business.
  • The D.C. Lottery and Charitable Games Control Board is weighing working with Pollard to deploy the “Tetris”, “Frogger” and “Pac Man” li-censes across a range of lottery games including instant, says the Board’s John Gorman. Once-iconic videogames have been a big draw for the younger 18-34-year-old audiences lotteries are seeking to attract. The D.C. Lottery also is considering a Skee-Ball license available through Alchemy3 that would feature instant and Fast Play tickets containing a QR code that would al-low players to unlock additional online Skee-Ball games, says Gorman.

Demographics
“We look at the demographics and try and measure where we are going to have the greatest impact,” with a li-censed product, says Florida’s Rock. “That is the key.  When a vendor comes in, we want to know [which demographic segment] we are selling to and what the benefit is for the lottery.”

The top-selling licenses tend to be established entertainment brands such as Monopoly and Wheel of Fortune, as well as automotive brands. Rarely do tickets feature first-run movies because of the relatively short run most films have in theaters. Popular TV series such as “The Walking Dead” can be a major draw, but were first tested in five states to make sure there was demand be-fore expanding to 16 states, says Marc Mostman of Striker Entertainment, which represents the property.

Scientific Games’ Saferin says that films based on original stories don’t make sense for a lottery game, since there’s no established consumer base. On the other hand, once a film moves into franchise territory, it could be a candidate: “We aren’t looking for small slivers of the population because we want this to be a mass product.”

For licensors, the revenue generated from a lottery license may be secondary to the marketing exposure. Hasbro’s Mark Blecher says they’re important in keeping “our brands top of mind” and connecting with fans in “new and unique ways.” In the lottery cate-gory, Hasbro focuses on its brands with “nostalgia value” that have been “enjoyed for generations and have a strong adult audience.”

Validation... of a property
Mostman says that a successful lottery game can help “validate” an entertainment property, a sign that “you have made it [as] part of the pop culture ether. It’s a unique spoke in the licensing wheel and [puts] you in a much broader retail channel where… there isn’t necessarily a ‘Walking Dead’ section of merchandise” such as  convenience stores and gas stations.

Sports-themed lottery tickets typically sell at or slightly below the industry average, says Saferin. This is largely tied to some states having multiple sports franchises, making a statewide lottery based a single club a difficult sell. Scientific has licenses for the National Basketball Association, Major League Baseball and the National Hockey League; the National Football League lets its teams do lottery deals individually with state boards (given the localized nature of the business).

Looming on the horizon are state lotteries offering digital versions of their paper-based instant and other games. But the move to virtual lotteries has been slow. Michigan is the only state currently using a virtual iLottery plat-form that was launched with Pollard in 2014 and so far only uses non-licensed Keno and other games. Many state legislatures have opposed digital-based lotteries, with opponents arguing that they make games even more accessible to problem gamblers and bring them into the home rather than limiting sales to stores. Minnesota introduced one in 2014 only to have the state legislature pass a bill last year repealing it.

Despite the uncertainty, lottery vendors are preparing for a change. Pollard seeks digital rights in many new licensing agreements, says Aiello. “We will see more of the digital lotteries, but it will be slow to come just like everything else can be in lotteries,” says Aiello. “At the end of the day these are state agencies and you get a lot of bureaucracy and there is a lot of ebb and flow with the changes in government.”


About LIMA: LIMA – the International Licensing Industry Merchandisers’ Association – is the leading trade organization for the global licensing industry.  LIMA’s mission is to foster the growth and expansion of licensing around the world, raise the level of professionalism for licensing practitioners, and create greater awareness of the benefits of licensing to the business community at large.

About Alchemy3: Started in 2007, Alchemy3 maintains trusted relationships with North American lotteries and is one of a select few companies in America that holds exclusive licenses to companies like The Home Depot, Honda, Royal Caribbean International, Polaris and Bass Pro Shops. To learn more about Alchemy3, visit alchemy3.com.