34 / 100
34
// PUBLIC GAMING INTERNATIONAL // September/October 2016
ing them to look for value in that specific
feature. Like Sears trained its customers to
wait for sales promotions to buy its prod-
ucts. You go down that path of training the
players to expect higher prize-payout per-
centages and then you are under even more
pressure to continue to increase that prize-
payout percentage. And your costs increase
because you need the infrastructure to sup-
port the higher sales required to maintain
a net that is based on decreasing margins.
Why do that? I would rather generate $980
million net on $3 billion in sales than
$1 billion net on $5 billion in sales. The
higher margin model is a more efficient use
of resources, a more responsible model for
player protection against over-spending,
and it is a more sustainable model going
forward for future generations. During the
recent recession, instant games with high
price points and high prize payouts were
the first to decline in sales leaving lotteries
dependent on them for revenue in a quan-
dary. Prize payouts and price points are just
one part of an overall strategy for growing
our business.
Your experience as a CPA seems to have in-
stilled a good instinct for the way real-world
entrepreneurs assess pricing and business-
model strategies.
C. Hedinger:
I think so. I spent a large
part of my career working with all sizes and
shapes of businesses, from small businesses
right up to large publicly traded companies,
and this is the way they think about how to
build a sustainable enterprise. These same
fundamental market-place dynamics apply
to the Lottery just as they do to commer-
cial private-enterprise businesses.
Of course, it takes a variety of functional
disciplines to make a business success-
ful. Marketing, operations, sales, logistics,
product development, and other areas are
indispensable components to all business,
and especially for larger businesses like a
state lottery. I appreciate and respect that.
But in the end, our mission is to maximize
revenues for our good causes, prioritize re-
sponsible gaming for the protection of the
consumer, and to operate responsibly from a
financial management perspective. None of
those objectives is about maximizing sales.
It’s about maximizing business efficiencies,
management discipline, and net proceeds
for the beneficiaries of lottery funding.
In FY2015, you even over-shot the mandate
of 30% net to return to the state by 2 points.
I would observe, though, that sales of the New
Jersey Lottery have also increased every year
since 2008, surpassing the $3 billion mile-
stone in FY2015.
C. Hedinger:
A business with a high
margin like Lottery depends on an increase
in sales. So we do need to keep our focus
on the top line as well. We do that by meet-
ing the needs of the consumer, producing
great games, promoting them effectively,
and doing all the things necessary to drive
sales growth like good customer service and
supporting our retailers.
Responsible Gaming is also a top prior-
ity for us. To that end, we want to ful-
fill our financial obligations to the state
without compromising our commitment
to provide a form of recreational gaming
that is entertaining and fun. Insofar as the
prize-payouts keep climbing, there is a
point at which Lottery begins to resemble
the play-style of slot machines. What is
the difference between Instant games that
pay out over 80% and slot machines that
pay out 85%? We do not want to encour-
age a gambling mentality when it comes
to the state Lottery.
In past conversations, and in my observations
of your comments on panel discussions, I have
always been impressed by your approach to-
wards innovation. I would have expected a
more conservative, risk-averse approach than
you seem to apply.
C. Hedinger:
I think we should all be
risk-averse! Risk is something we want to
do everything possible to minimize. I think
most lottery directors are bemused when
we read current biz-lit that admonishes us
to be willing to make mistakes because that
is the only way to innovate and grow, etc.
I can only speak for myself, but we put a
very high priority on avoiding mistakes and
make no apologies for that!
That said, it can also be a mistake to not
assume some calculated measure of risk
to make the necessary changes to keep up
with changes in the market-place. The risk-
assessment model applied by state govern-
ment lotteries is going to be more conser-
vative than those applied by start-up tech
companies. In fact, state Lotteries will be
more conservative than almost all sectors of
private enterprise. And that is as it should
be. We are the shepherds of a multi-billion
dollar brand that is owned by the people of
this state. Our first priority is to preserve the
value of that brand for future generations.
It is not to maximize short-term profits for
the benefit of private shareholders who may
have a bigger appetite for risk than a state
government has. And consider the aspect in
which the value of that brand is almost all
tied to intangible assets like trust, integrity,
and reputation. The value of those assets is
in the billions of dollars. And it is ephem-
eral, very vulnerable to dramatic devalu-
ation with even small miss-steps. Are we
risk-averse when it comes to managing the
value of those assets? You bet we are.
However, we have never been averse
to taking calculated risks. New Jersey has
done a lot of “firsts:” first to introduce a
computerized game—Pick-it, first to go
online using terminals allowing players to
select their own numbers—an event that
revolutionized the industry, first to use
LOLA—Lottery On-Line Ticket Account-
ing System, first to offer a second-chance
drawing with the MDI-licensed Elvis
™
in-
stant game, first to offer “Cyber Slingo
®
” a
scratch game with an internet play compo-
nent, first to Livestream drawings and first
to Livestream a live lottery event.
You go down that path of training the players to
expect higher prize-payout percentages and then
you are under even more pressure to continue to
increase that prize-payout percentage.