'Online lottery will overtake paper lottery in 5 years'

The competition in the online lottery arena in India is about to hot up.

After Playwin, run by Subhash Chandra-owned Essel Group of Industries, many other players like Lalit K Modi's Modi Enterprises, Venugopal Dhoot's Videocon group, P K Mittal's Ispat group and a clutch of regional players are all hoping to convert the Rs 50,000 crore (Rs 500 billion) paper lottery business into a large online lottery market.

Off the block before many of the other contenders is the Ruia-owned Essar Teleholdings' Fortune online lottery.

In association with Computer Aided Information and Research Services Private Limited, Fortune is the sole distributor and marketing agent for the online lottery organised and promoted by Nagaland.

Zeev Leshem, Chief Operating Officer, Fortune, is leading the Essar Group's foray into the market.

Leshem, who is planning the installation of 10,000 online terminals by year's end, is competing against established online rival Playwin and India's outmoded paper lottery system for the chance to sell you that winning ticket.

Gavin O'Malley recently caught up with Leshem for an interview. Excerpts:

Aside from those lucky jackpot winners, there are three parties that expect to profit from this venture: The state governments of India, the local retailers, and you. How will the revenues be distributed?

In gross figures, we will get about 25 per cent of the operations. We have to pay the rest to retailers and distributors for the cost of sales tax, and then to the government of Nagaland (Fortune is licensed in Nagaland).

Other states (Sikkim, Karnataka, etc) involved are collecting sales tax which comes to about 20 per cent -- the retailer gets 5 per cent on the face value of every ticket sold, 1 per cent on the winnings of daily lotteries that they sell, and 2 per cent on jackpots winnings of up to Rs 2 crore (Rs 20 million).

BOT (build-operate-transfer business model) projects are those in which a government grants a concession for a predetermined period of time for a private consortium to build, operate, and manage a project, and eventually recoup costs and profits. Is this identical to Fortune's model in India?

The only difference is that we, as the operator, offer a 'guaranteed amount' to the government, which is a minimum amount of revenue that they can get on a yearly basis.

Under BOT, at the end of the concession period, the project is transferred from the private group to the government at such a state and conditions as stipulated in a predetermined contract agreement. When, and on what grounds, do you plan to turn the lottery system over to the state governments of India?

This isn't the case. We don't do that, and I'm not aware that any operators that do that.

Our contract with the government is for ten years and from a practical point of view, our equipment and software will be outdated by then and the government will probably just hold a bid to award a new contract and got from there.

What revenues will you need to bring in to justify your foray into the online lottery market?

Our projection is that our annual revenue from year four of the operations and onward will be approximately $500 million. Playwin with 5,000 terminals now is doing over $200 million a year.

At the end of the second year of operations, we hope to have our 10,000 terminals in operation.

In order to succeed, you will need a legitimate 'point of sale', i.e., to recruit retailers to take in the 10,000 terminals you plan to install. Sale of lottery tickets offer a very low profit margin compared to other products a retailer could concern himself with. How will you convince them to take in your terminals?

First there is the chance to get the 2 per cent per cent of the jackpot winnings; then you must consider the 'stockage of goods' that you don't have to worry about with lotto.

Also, the sale session of a normal product is about 5 minutes, while the sale session on lotto is only about 10-15 seconds (unless you are a new customer and have to understand what lotto is).

Do you foresee any government interference?

No, I think that the trend all over India will be quite the opposite. Some might stay out like Gujarat, which is very conservative, but that is definitely an isolated event.

What does online lottery offer the consumer that the traditional paper lottery system couldn't?

Online allows you to pick your numbers -- pre-printed lottery tickets cannot do large jackpots because it is too complicated for its primitive system.

Rs 10 lakh (Rs 1 million) is the biggest I've seen in paper lottery. The centre of the online system is in control of the entire system to prevent the corruption that is common with paper systems.

How will you effectively compete with rival Playwin?

I think Playwin has barely scratched the potential of the market.

They have an excellent product and are excellent competitors. I admire their courage to take products from the market which they don't see as successful.

I know that our products are better and are better tailored to the Indian market. Playwin just copies the game format that they sell in the US.

The market is huge and there is no way one operator can control or serve the whole market.

I think at least five operators will be needed to fill the whole Indian market. The whole Indian system needs something between 500,000-1 million outlets.

You've overseen the proliferation of online lottery systems in Europe, Israel, Asia, and Africa. What have you learned in those regions that, you suppose, will apply to the India market? How have you adjusted your business model?

We are finding out what the particularities to this market are and adjusting the games accordingly.

We must remember that not every 'point of sale' needs a terminal. In Ghana, we learned to position our terminals carefully because there it was difficult to find electricity, let alone connectivity.

In The Netherlands, lotto was sold through ATMs; that is the very essence of connectivity.

In the US the price of entry is about $1-2 per ticket, in India it's about Rs 10. Paper and electricity are negligible in the US, but its cost in India is nearly the cost of the commission we pay the retailer, so we must try to find a solution to this.

How do you envision the online lottery market, and Fortune's place in it, in India five or ten years from now?

The online version will overtake the paper lotto market, if not completely than by at least 80 per cent, within five years.

I hope that our share will not be less than 33-40 per cent, assuming that there will be about five operators in the market.

Are you concerned that developing nations like India will move to a US-like state controlled lottery once they've established the proper infrastructure?

The model that is used in the US is regressive. It's a monopoly operated by the state employees rather than on a business principle.

Connecticut is the first state that is considering privatisation. Privatisation means making more. The Western World will follow India's example which began totally as a private enterprise.

There is a limit to what civil servants can do.

Do you think the lottery loses a degree of social legitimacy when it's a privatised affair?

No, the private sector will make more money than the monopolistic government ever could.

The biggest beneficiaries will be the punters, the consumers, and the players.

Gavin O'Malley, a graduate student of business journalism at City University of New York, is spending six weeks at rediff.com.