Indian business takes a gamble on
lotteries By Raju Bist
MUMBAI
- Tapping into new overseas markets, finally getting
their manufacturing act right, buying up foreign
companies - Indian businessmen are slowly being
recognized worldwide for their many achievements. Yet
thinking up original business ideas continues to elude
them, as nowhere is the herd mentality more evident than
in the Indian business world.
A few years ago,
every other Indian business house diversified into the
exports of granite. Then it was the setting up of small
steel mills. Now everyone and his uncle wants to try
their luck in the online lottery business. (At the
outset, a caveat: online does not have anything to do
with the Internet. What it means is that the business
activity is conducted through electronic terminals
linked via telephone lines, very small aperture
satellites, general packet radio switching or C-Band
radio.)
The total Indian lottery market is
estimated at around Rs 500 billion (US$11 billion), with
the business growing at 35 percent annually. Around 20
percent of the lottery currently is conducted online. It
all began when the Essel Group's Subhash Chandra, the
pioneer behind the Zee TV network, launched the Playwin
brand of online lottery through his group company Pan
India Network Infravest Ltd. Till then, the Indian
gambler had tried his luck only via traditional paper
lotteries, whose results were announced usually every
month-end. But Playwin was something different.
You can bet your numbers that spanking new
electronic terminals sprung up overnight on every street
corner. That very evening, or a week later, you saw the
live draw results on various nation-wide Zee TV channels
as well as other regional channels like Udaya TV, Sun TV
and Asianet. It was fast - and most importantly, it was
transparent. Playwin was an instant hit. By February
2003, within a year of its operation and on a turnover
of Rs 7 billion, it had achieved cash break-even.
Apart from the attraction of transparency, new
operators hoped that the business would go the way of
the United States and Britain, where online lotteries
have overtaken traditional rivals. In the US, online
lotteries have created 20,000 millionaires to date. And
in Britain, online lotteries reportedly outsell even
fast food giant McDonalds. There was also the lure of
high-technology and the potential of a vast, untapped
Indian market.
Lured by the media frenzy
generated by Playwin, others jumped onto the bandwagon.
Today, the list of those offering online lotteries - and
those planning to - reads like a veritable who's who of
Indian industry.
There's the Fortune lottery,
promoted by the Essar Group, which has interests in
steel, finance and petrochemicals. Modi Enterprises, an
offshoot of the Modi Group, one of the oldest Indian
business houses, is also in the fray. It is launching a
mother brand called Sunshine Lottery, and this will be
followed by other sub-brands. The ubiquitous Dhoot
brothers of the Videocon Group, who have evinced
interest in new areas like shipping, TV broadcasting and
aviation, have also thrown their hat into the online
lottery ring. But nobody is taking them seriously as
most of their plans to diversify into new areas have
come to naught.
Apollo International, one of
India's largest tire manufacturers, has won the license
to market the online lottery of the desert state of
Rajasthan after bidding a minimum agency fee of Rs 560
million. It has agreed to achieving a minimum turnover
of Rs 1.5 billion in the first year of operations and
cumulatively Rs 25 billion in the seventh year. Finally,
Martin Lottery Agencies has launched the Smartwin brand
after bagging licenses for Maharashtra, Kerala and
Karnataka states.
Linked to the business of
online lotteries is the income of many Indian states.
Paradoxically, while many cash-starved states come down
heavily on all forms of gambling like horse racing and
small lotto-type operations run by private players, they
run their own lotteries, for it provides a quick way of
earning some much-needed revenue. But the politicians,
as expected, give a different spin to this necessity.
When inaugurating Karnataka state's online lottery in
August 2002, Chief Minister S M Krishna said, "Whoever
plays it [the lottery] will also be contributing
indirectly to the development of our state."
This arrangement between a private operator and
state government, however, brings its own sets of
problems. The Maharashtra government recently cancelled
the license for the Essel Group when the two fell out
over the revenue sharing arrangement. And Modi
Enterprises took the northeast Indian state of Sikkim to
court, alleging that preferential treatment had been
given to the Essel group in the tendering process for
the lottery license. In spite of these problems, the
Essel Group was able to win bids for Mizoram, Arunachal
Pradesh and Karnataka states.
Most of the 14
Indian states where gambling is allowed have gone
online, attracted by the substantial increase in earning
potential. In place of just 1 percent of total revenue
(which they earn from the conventional paper lottery
schemes), for the online lottery, the states receive at
least 20 percent of the revenue generated. In Karnataka,
for example, Essel has agreed to pay the state
government Rs 11 billion between 2002 and 2007. In
addition, the government will earn a sales tax of Rs
15,000 per draw (Essel has received an approval to
conduct up to 10 draws every day).
How important
an online lottery is in an Indian state's scheme of
things is evident from the example of Kerala, India's
picturesque southern-most state which heavily relies on
tourism for its income. Exactly a year ago, this bastion
of leftist ideology launched its own online lottery
after witnessing the success of similar lotteries
sponsored by other state governments in the country. The
state's finance minister admitted to press reporters
that the popularity of online lotteries had made a dent
in the sales of the Kerala government's conventional
paper lottery. Since the introduction of various online
lotteries, traditional paper lottery ticket sales had
plunged by more than 30 percent in the state.
Even though the operators may be gung-ho about
the prospects of the business, not all of them have met
with success. Playwin clearly is the leader with its
first mover advantage. It also has the backup of a vast
TV network to announce the draws as well as to propagate
its services. Of the others, Smartwin is touted to end
up a winner since it is very strong in the paper lottery
business and the equity of this activity has spilled
over to its online venture.
DhanDhanaDhan is the
only other company which stands to gain since it is
backed by reclusive millionaire Shapoorji Pallonji
Mistry, the largest private investor in Tata Sons, the
holding company controlling Tata Group, India's second
largest and the oldest business house. DhanDhanaDhan was
launched in July last by the Pallonji-controlled Forbes
Group with the marketing of online tickets in Meghalaya
state. The telecasts of its draws were seen on ETV,
Asianet and Aaj Tak TV channels. Since then,
DhanDhanaDhan also bagged the license to sell lottery
tickets of Arunachal Pradesh state.
Mistry's
deep pockets will help DhanDhanaDhan tide over the long
gestation period that an entry into the online lottery
business normally entails. But this is not something
that the other businessmen enjoy. Investments in
technology for both hardware and software are imperative
for the companies and all the players need to have
strong financial support. The lottery business hinges on
the placement of online terminals over a larger
geographical area. A quick look at the figures shows
that there is big money involved in the game. Playwin,
for example, has spent around Rs 5 billion in setting up
and propagating the activity. Similarly, DhanDhanaDhan
has sunk in about Rs 900 million in advertising alone.
The payout towards prize money is 60 percent.
Then there is the sales tax of 10 percent. Around 8
percent goes to the retailer. Finally, the balance of 22
percent is split between the state government and the
operator. An online operator needs a turnover of around
Rs 2.75 billion merely to break even. Thus, the online
lottery business involves huge upfront investment. An
operator has to be very good and very patient to build
the market.
But a large treasure chest of cash
is something that most of the new entrants definitely
lack. Essar, for example, has been able to place its
terminals only in the states of Kerala and West Bengal
and has gradually seen its business decline. This, even
though the group had planned to expand to the states of
Nagaland and Karnataka too within three months of its
lottery's launch in January 2003. The Modi family is in
the midst of a bitter struggle for the division of
assets and Modi Enterprises has been reeling under a
lack of funds. The group's Sunshine India Lottery was
envisaged to expand to a network of 5,000 retailers by
December 2003. In reality, it has not been able to touch
even one-tenth of that number.
That most of the
new players were motivated by the greed of quick returns
and had jumped into the fray without doing their
financial homework is clear from the example of the
Dhoots. Struggling for cash since they are rapidly
losing the market share in their core activity of
consumer electronics, especially after the advent of
Korean giants Samsung and LG, they nevertheless floated
a new company, Dhoot Entertainment Network (DEN).
In October 2003, DEN had announced the
simultaneous launch of its V1 online lottery in three
states - Kerala, West Bengal and Maharashtra. But to
date, there has been no sign of this activity. The
Dhoots' plans to raise fresh capital from the stock
markets has also been stymied after being hauled up for
insider trading by the Securities & Exchange Board
of Indian, the country's capital market watchdog.
Apart from the precarious financial condition of
the promoters, there are other roadblocks. For one, many
retailers are not very happy with the financial
arrangements proposed by online lottery companies. These
include earning regular returns, service charge returns,
jackpot returns as well as interest on the initial
deposit. The retailers feel that they are not being
compensated enough if one takes into account the huge
investments they have to make initially in setting up
the hardware and the software to run it. The result:
most of them are unwilling to pay the deposit of up to
Rs 200,000 asked for each terminal.
Many
aspirants with licenses thus don't have enough
retailers. Also, some of the licensees don't have
sufficient knowledge of the business. Deposits from
retailers have come down since Playwin entered the
business. Traditional paper lotteries have a much wider,
historical network. Also, customers are not accepting
the rollover system, where the payout is reduced to the
incremental collection rather than the announced prize.
The projected numbers of potential customers
just didn't materialize. The novelty of online gambling
has also worn out quickly for customers, especially
after they realized that while in the case of online
lotteries, the prize payout is just 60 percent, while in
the case of paper lotteries, it can range between a high
of 80 to 90 percent. In other words, more people have a
chance of winning a traditional lottery. Hampered by
high start-up as well as license fees, online lotteries
will just not be able to match the payouts of their
older rivals.
Analysts feel that the Indian
businessman's get-rich-quick mentality will sound the
death knell for many of the operators. There seems to be
just too many players chasing what has turned out to be
a very small pie. A shakeout is imminent and once the
dust settles only two or three players will be left
standing. But even the survivors will have to manage
their operations very well. They will have to set up
very stringent internal corporate standards and take a
long term approach. At the end of the day, they will
have to keep in mind that the lottery business revolves
around trust and credibility.
(Copyright 2004
Asia Times Online Ltd. All rights reserved. Please
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Jan 28, 2004
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