Games People Play

Michigan’s 36-year-old lottery is a state-operated cash cow that ostensibly benefits public education. But would the state and its citizenry be better off if it were simply privatized?
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Games People Play
Nidhal Dishow became a $2-million instant-ticket winner at a Detroit Pistons game in March 2005. Photograph Courtesy of www.domagalskiphotography.com

Pity the poor Michigan Lottery official, caught in the middle. Players drop $2.3 billion a year and crave generous prizes and new games. But lawmakers eye the same fat lottery pot to help fund public education.

Critics rue the very notion of government luring people to gamble. But on the other hand, a lottery with no new action withers and dies. As it is, the U.S. lottery market has matured, making it difficult to duplicate the impressive growth of the 1980s and 1990s. Some skeptics even wonder whether government should compete with the private gaming industry, which, in Michigan, now includes casinos stretched from Detroit to the Upper Peninsula.

Chalk up the Michigan Lottery as a political and financial tightrope. It’s both big business and public agency — dual roles that sometimes war on each other. On the business side, the three most important things about the lottery are product, product, and product. To keep players interested, the agency launches some 70 new games a year, including scratch-off tickets geared to changing tastes, sports, and special events.

“The secret of instant games has always been variety,” says Tom Weber, Michigan’s chief deputy lottery commissioner. “Because it’s an impulse buy, you want to appeal to people. You’ve got to do it in a short, quick burst. You’ve got to appeal to all kinds of interests. So we’re looking for niches of games, niches of players. One game is a game like cards. Another one is cute, fuzzy animals like our Lucky Dog game.”

Years ago, the lottery created about 20 new $1 games a year, a strategy that eventually had limited appeal. So the agency upped the ante.

“We found that a $2 game with lots of $500 prizes is really popular,” says Glenn Strong, who manages the instant games for the Michigan Lottery. “That money theme is tried and true. We’ve launched a series of games that played off this $500 theme. We change the art but leave the play style alone.”

Still, Mega Millions, a multi-state game, gets most of the lottery-win headlines. In April, for example, Livonia resident David Sneath, a hi-lo driver, bought a lucky ticket worth $136 million against long odds.

But less-publicized instant games actually take in more of the lottery’s bread-and-butter revenue — 31 percent last year. By comparison, Mega Millions accounts for only 9 percent of the action. Other revenue streams include daily games (30 percent of sales), and Club Keno and Keno (22 percent). Raffle games, Fantasy 5, and other popular games make up the rest of the annual revenue.

As it stands, players take home about 57 percent of the loot in prizes. The remainder goes into the school fund and pays operating expenses and retailer commissions.

University of Detroit Mercy marketing professor Michael Bernacchi says he’s galled by the idea of using education as a hook to lure gamblers. On the other hand, the Michigan Bureau of State Lottery knows how to market their products. “I give it to the folks [who] run the lottery,” he says. “They use every contemporary hook possible (like sports games). That’s Marketing 101. Try to be contemporary and cause a sense of emotion, an urgency, and a rush.

“Does this mean that education is well-funded? Of course not. Spending the money has nothing to do with the goal of helping education. It has to do with satisfying the need to gamble.”

Overall, ever-changing instant games pay out about 65 percent. The higher-priced $20 ticket gives a 73 percent payout, and $1 games pay out about 60 percent. Very low rollers can opt for a 50-cent pull tab card, sold in bars and restaurants, with a top prize of $100.

To stay on top of its marketing game, Michigan Lottery officials map out a strategy months ahead of time. Last May, for example, a focus group convened to test new concepts, including a game aimed at next Valentine’s Day. Proposed prizes include diamonds. And if the oohs and aahs are any indication, it looks like a go.

Another idea didn’t test so well: A scratch-off to win a free year’s worth of gas. For one thing, people in the group didn’t agree on what amount of winnings equal a year’s worth of fuel. So it was back to the game-design drawing board.

Over the years, officials have had plenty of intriguing brainstorms, including an Elvis game. But The King didn’t play well with a Michigan test group.

“There was a point in this industry when Elvis was very hot,” Strong recalls. “A lot of states were doing it. We took it to focus [groups], but they just didn’t care for it. I was absolutely shocked by that. It was a game I thought would really be attractive to our players.”

Clyde Barrow, director of the Center for Policy Analysis at the University of Massachusetts Dartmouth, says creating lots of new games typifies a mature lottery. “You’ll see the rate of increase start to slow,” says Barrow, whose center conducts gaming research. “Then you’ll see it level off. It may increase 2 or 3 percent a year — unless you can come up with some new gimmick. One gimmick is more expensive tickets. And in some sense, all that’s doing is changing the price point to catch up with inflation. The $5 ticket today is a lot different than the one 20 years ago. So you have to raise prices to keep up with inflation.”

Since selling its first ticket in 1972, the Michigan Lottery has contributed $14 billion to public education.

But the growth in contributions is leveling off. In the first 10 years, contributions jumped more than 400 percent. Growth in the second decade was some 130 percent and about 30 percent during the third. For fiscal year 2009, state officials expect little or no increase in the lottery’s contribution to the $11 billion school aid fund. The lottery typically kicks in about 7 percent of the fund. Most of the rest comes from sales taxes, income taxes, and other tariffs.

Like other Michigan businesses, the lottery has taken a hit in a tough economy. And as a public agency, it also weathers political and legal constraints. In 2004, for example, Michigan voters amended the state constitution to limit lottery expansion. No new lottery game using table games or player-operated devices can be launched without a statewide vote. To grow the business, lottery officials make the existing categories of games — such as instant tickets — work in different ways to attract and keep customers.

Like any arm of government, the lottery also self-censors. “We have to be real sensitive to not over-appeal to kids,” says Weber, the deputy commissioner. For example, game designers are wary of using cartoons on instant game cards, he says.

“We might run a game like Betty Boop, which is the old cartoon. But that’s more mature. The kids wouldn’t even know who she is, as opposed to SpongeBob or something. And we’re a state agency and can’t get too racy with our games. We have to toe the line.”

At its core, lottery is pure chance. Being at the right place at the right time counts. And big winners who beat the odds never forget the rush. Doug Thomas, a retired Lansing fire department captain, hit twice in back-to-back years — for $250,000 and $100,000 — on scratch-off cards.

For the $250,000 hit, he was on his way to buy parts to fix a balky clothes dryer. “So I stopped at the Quality Dairy,” he recalls. “I went in to get a bottle of pop and said, ‘You know, give me one of those $5 tickets there.’ I went out, sat in my truck, opened up whatever I was drinking, and scratched the ticket. I had three matching things, and I scratched it and it said ‘$250,000.’

“I said, ‘This can’t be right!’ So I walked back into the store and asked this girl to check it for me. She went to the machine and her jaw dropped. I was shaking. You can’t imagine what it’s like. We were jumping around. It’s a feeling you can’t imagine. It’s elation all over.”

In some respects, the lottery is based on the premise that more money poured into education will increase student performance. But research doesn’t always support the notion. It’s not uncommon for schools with low per-pupil spending to outperform their high-spending counterparts.

Economist David Littmann questions whether government should be in the lottery business in the first place. “It’s a huge intrusion into the entertainment industry, and it does compete,” says Littmann, senior economist at the conservative think-tank Mackinac Center for Public Policy.

“[The lottery] makes the assumption that the more money you have, the better your education product will be,” he says. “That’s demonstrably false. The two significant variables that influence the outcomes in public education are parental involvement and high expectations.”

Littmann, former chief economist for Comerica Bank, sees other problems with the lottery. “Studies have all shown that where these state lotteries exist, they always proliferate more in the low-income areas — people looking to strike it rich,” he says. “The odds are much less than they would be in privately run casinos. It’s not a way of uplifting the standard of life or standard of living for the vast majority of players.

“In that sense, it’s entertainment. But it’s a setback in terms of disposable income, discretionary income, and spending that could otherwise be used for improving human capital.” The lottery, he adds, should be privatized for whatever money the state can get.

“Use that for the all-important tax refunds and disciplined [state] spending,” he proposes. “Focus on state responsibilities rather than proliferating marginal activities that the private sector or individuals should be doing.”

Last fall, state officials briefly toyed with selling the lottery, or the rights to its revenue. But the idea didn’t fly. Lawmakers say it remains an option, depending on future budget concerns. The value of the lottery, were it a business on the market, is estimated at about $5 billion. Barrow, the University of Massachusetts Center for Policy Analysis director, says privately run lotteries have a pedigree.

“The United States has been through this before,” he says. “Universities used to run lotteries. They used lotteries to raise money to build the Erie Canal. The problem was that private lotteries eventually got out of control. They weren’t regulated well, and they ended up abolishing lotteries all over the country because of scandals associated with them.”

Barrow says that lotteries can grow with bigger advertising budgets and payouts. “Even in states with high lottery participation, you generally don’t see more than about 50 percent of the population playing right now,” he says. “There’s potentially a bigger market.”

In terms of sales, one of the worst things a lottery can do is squeeze the players to provide more revenue to the state. “Texas had a bad experience a few years back,” Barrow says. “They actually cut their payout rate, thinking if they kept more of the revenue they would have more money. The sales just plummeted. People immediately recognized that they weren’t winning.”

The Michigan Lottery relies on retailers to push the games at point-of-sale and rewards them with commissions. Last year, the commissions topped $172 million to nearly 11,000 retailers. They’re paid 6 percent on all tickets sold, plus other incentives up to a $50,000 bonus for selling a Mega Millions jackpot-winning ticket.

Michigan Lottery Commissioner M. Scott Bowen, named to his post earlier this year, says his initial plans call for tweaking advertising and working with retailers to increase sales. The games, he says, evolved from the original ticket 35 years ago to today’s wide array of games.

“What’s to say that in 35 years it won’t evolve again,” he says. “At the 70th-year anniversary, we probably won’t recognize the lottery as it is today.”

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