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July 7th, 2012


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06:58 pm - The Big Scratch
In May, Camelot, the operators of the UK National Lottery, inaugurated an instant-win scratchcard at higher stakes than they had ever offered before. Previously, the highest-stakes scratchcard in the UK cost five pounds sterling; most five-pound games have top prizes of one million pounds, though the first five-pound game in 2003 had a small number of two million pound jackpot prizes. (For completeness, some cards technically offer annuity prizes instead which have the potential to be higher total payouts over time.) This new card costs ten pounds and has a top prize of four million pounds.

I am moderately opposed to developments in this direction. In general, I tend to slightly oppose enterprises that will redistribute from the poor to the rich. That said, there are a couple of significant exceptions to this; I enjoy writing at great length about poker and some lotteries, including the famous El Gordo of Spain. Similarly, I don't have much time for unrestricted no-holds-barred capitalism, but poker is such an interesting game, at the sweet spot combinatorically and psychologically, that I cut it - and the ramblin' gamblin' tales it and its players generate - a lot of slack.

Likewise, I think that the existence of a big lottery, singular, adds considerably to the jollity of a nation, and I look forward to a day soon where there is a giant global lottery with a bigger jackpot than ever as a "water cooler event" that might hopefully even be a step towards getting people to think globally and drive against nationalism. Count me in for that, sometimes; I just hope it obviates the other smaller lotteries and drives them out of business. The UK's National Lottery was brilliant when there was just the one game, once a week. The expansion to several draws a week, and several different games, has left the draw much less exciting and the nation culturally poorer; it has also left those who feel the need to play every draw, out of loyalty to their numbers, financially poorer.

By extension, my views on casino games are also mixed; I am broadly in favour of (regulated, fair) casino table games, in part because they generate what I consider entirely respectable (but often low-level) show business jobs, and in part because some of them actually have some decent - if rudimentary - game to them. For instance, I wrote about Casino Backgammon about two years ago, though the game's web site hasn't survived, and I suspect the game itself hasn't made it either. By contrast, I don't have much time for slot machines, keno or any other games which efficiently maximise the rate of loss and efficiently minimise the degree of human involvement. Scratchcards come into that category, so I don't like 'em. (Technically, I don't like the ones you have to buy; I've also written about interesting scratchcard designs as promotional gimmicks over the years.)

I'm more opposed to the ready availability of relatively high stake play than anything else. Sure, if someone was determined to spend £10 on scratchcards, they always could - they would just buy several scratchcards before, and only buy one now. However, I don't think people set out to spend specific sums on scratchcards as often as they intend to buy a scratchcard. It's a similar argument to the one about food portion sizes, and it's one where I have a lot of sympathy for those in favour of ready availability of small portions, without intending to support "portion size shaming". Surely having to play several different scratchcards gets boring after a while in a way that playing a single card does not!

Even then, £10 certainly isn't a bankbreaking stake; scratchcards.org suggests that it's quite common for US states to have $20 stake cards, that New York has - or, at least, has had - $30 cards and the stereotypical viewpoint that everything is bigger and better in Texas holds up with the fact that they've had $50 cards, and people spending huge money on them, since 2007. In the Texas case there's the caveat that Texas only has one fixed casino, one casino cruise ship and some racetracks, so gamblers only really have that as their outlet.

That's sticking to scratchcards, too. If you're prepared to travel, casinos will take many times that in bets. You'll very probably find table games at the highest nosebleed stakes, but someone has posted video of a slot machine that charges $5,000 to play. I find this ridiculous - but yet somehow slightly jolly - rather than offensive; if you've had to travel to a casino to place an outlandish wager, it's a deliberate, premeditated action. Scratchcards worry me more because they are so readily available in so many places; the temptation comes to you, not you to it.

This $5,000-a-spin machine doesn't look to me to be any more fun to play than one that happens to be, say, $0.05 - five orders of magnitude smaller. While I guess the casino could probably easily afford to pay back 99% - 99.9% of the money it takes on that machine in prizes, compared to a typical percentage of 95%-96% for $1 machines, I would hope that a single play of a $5,000 machine would result in three members of the Blue Man Group being summoned to paint the results of the reel spins on canvas for you, accompanied by a night in the casino's finest suite, with room service of a steak, lobster and caviar dinner and Penn and Teller making personal appearances to perform magic tricks and to sneak parsley onto your plate. In truth, I suspect it's three seconds and that's your lot, whatever the stake - and the $5,000 machines probably lose money in terms of electricity consumption and state tax, compared to their smaller neighbours, because nobody plays them.

The interesting thing about Camelot's scratchcards in the UK is that, well, I'm not sure quite how their economics work.

Going back to the £10-to-win-£4-million game, Camelot publish the prize distribution. The game consists of just over 16 and a half million tickets, of which about 69.7% win nothing, roughly 16% result in a return of the £10 stake, another 10% result in a £20 prize (so £10 profit), 1.5% result in a £30 prize, 1.4% result in a £50 prize and 1.3% result in a £100 prize. I've been rounding things here; the chances of you winning £500 or more are well under 0.1% - I've been lazy with the addition, but I reckon it's something like 1 in 2,300. Among these big prizes, the chances of you winning £4,000,000 are, well, a little worse than one in 4,000,000.

Camelot do publish updates on the progress of the game; there were four four-million tickets printed at the start, and as I type there are two prizes unclaimed. If every ticket in the game were sold, 74.34% of the total cost of entry would be repaid in prizes. That's actually about as good as scratchcards get, at least in the UK. (By way of comparison, picking some examples lazily, £5 entry Monopoly White pays nearly 69%, £3 entry Pot Of Gold pays 66%, £2 entry Hit The Jackpot pays nearly 64% and £1 entry Sizzling Cash pays 59%.) I think people pretty generally know that scratchcards are -EV, but some people get enough fun from them not to mind the rip-off.

Camelot have reasonably recently changed their web site and it's a lot harder to find out "where the money goes" than it used to be, and this is where I start to lose track of the figures. Other than paying prizes, some of the proceeds of Camelot's activities go as tax to the government, and that another part goes to Good Causes. The "where the money goes" page suggests additionally that "National Lottery retailers will earn 5% in sales commission for each Draw-Based Game – and 6% commission on each Scratchcard", that operating costs are around 4% of total revenue (for instance, did you know that when a retailer cashes your winning lottery ticket, they are paid 1% of the winning sum as their own commission in return for the cashflow headache that the ticket causes them?) and that Camelot are permitted to make between 0.3% and 0.5% in profit for their corporate shareholders, depending upon their performance at raising money for Good Causes.

The tricky part is that the proportions for prizes, tax and Good Causes are all aggregated over all Camelot's games - whether national lottery, international lottery, scratchcard or online game. If I can fair-use excerpt a little,
"The total amount which goes to the Good Causes depends on the mix of sales across different games and sales channels, the level of unclaimed prizes – and the amount raised in investment income from National Lottery balances waiting to be allocated. In the period up to March 2012, around 28% of total National Lottery revenue is expected to go to the Good Causes. During the new licence, over 50% of total National Lottery revenue is expected to be paid to winners in prizes, while 12% of total revenue is expected to be paid to the Government in Lottery Duty."
The part I don't get is how that Camelot can afford to run a scratchcard which pays back 74% in prizes, while still paying 12% to the government, 6% to the retailer and 28% to good causes. I'm happy for these figures not to add up to 100.0% by virtue of unclaimed prizes (which are double-counted in the prize fund and the Good Causes fund) and also by virtue of there being some returns from investment. However, I might expect that to make the figures add up to, perhaps, 101.5%, rather than this apparent 120%.

My attempt at an explanation is that there appears to be really quite a lot of difference between the way scratchcards work and the way, say, the lottery games work. When discussing prize calculation for the Lotto game, the one that people think of as the National Lottery, Camelot suggest that the lottery generally returns 45% of ticket sale revenue in prizes. In the nearly-20-year history of the lottery, this proportion has always been pretty constant. When the single National Lottery game was all there was, Camelot originally announced giving out 45% of revenue in regular prizes and reserving another 5% of prize money for occasional Super Draws. These Super Draws have, anecdotally, become considerably less common since scratchcards were issued.

Accordingly, I reckon that some of Camelot's games perform really quite differently to others. Let's assume that operating costs (including profit) plus retailer commission is 10% for both Lotto (5% operating costs, 5% retailer) and for scratchcards (4% operating costs, 6% retailer) and that the government takes 12% across the board, giving what could be considered a "rake" of 22%. I use this term, deriving it from poker tournament entry fees, as it's money that isn't returned in prizes and otherwise leaves the system.

This means that Lotto pays 45% in prizes and 22% in rake, leaving 33% to go towards Camelot's contribution towards Good Causes, whereas a 74% scratchcard pays 74% in prizes and an identical 22% in rake, leaving only 4% to go towards Camelot's contribution towards Good Causes.

33% versus 4% is a mighty big difference. Granted, the Lotto game turns over something of the order of two billion pounds a year (source: Richard Lloyd's lottery site's sales figures page) and the £4 million scratchcard will turn over about a sixth of a billion if all the cards go. Remembering that Camelot are incentivised in their permitted profit level to donate as much to Good Causes as possible, Camelot are going to have to try to get an awfully high proportion at 33% and an awfully low proportion at 4% in order to try to make the weighted average work out at 28% or better. (Remember, they do have some factors like unclaimed prizes and investment income working in their favour.)

As an aside, I don't know off-hand how the EuroMillions, other draw-based games (Thunderball, Lotto Plus 5...) or online games figure in all this; one might expect the other draw-based games to be similar. The online games pay back 63% (in the case of 25p Pluck a Duck) to 71% (in the case of £5 Rich For Life) in prizes, but because they have no physical product, there is no retailer commission to pay and probably a relatively low operating cost. Accordingly, one might guess that they can contribute somewhere between 15% and 25% to go towards the contribution towards Good Causes.

So, with all this in mind, why would Camelot ever make life as difficult for themselves, towards their goal of hitting or exceeding the 28% overall target, as they have done by ever offering a scratchcard that pays back as much as 74%? I can only suppose that it's the equivalent of a loss leader, to try to establish the price point. If there are further cards at similar price points, it'll be interesting to see whether they pay back similar proportions.

I also find it difficult to imagine that people will be able to tell the difference between a 74% payback card and a 59% payback card in practice; while it means that the proportion of cards which not just pay back but pay back more than their stake can be as high as a whopping 14.3% (against, e.g., 11.5% for the 59%-payback £1 Sizzing Cash) I imagine people are more likely to be excited by the size of their wins, both factual and dreamt, than by their chances.

It's interesting, though opaque to these untrained eyes, to browse through the legalese in order to see if there have been any significant changes in the way that Camelot are required to operate between the second and third (and current) licence periods, by which they are licenced to operate their games. Having ploughed through these documents, I tend to reach the shorthand conclusion of "not any that would wildly change the 12%-to-the-government, 28%-to-Good-Causes guideline percentages", while clearly there have been considerable changes to the way that the specific percentages are reached.

However, of particular interest and relevance here is the scratchcards licence page. Really interesting here is section 6 (2) which states that "Save with the prior written consent of the Commission, the maximum price of a Scratchcard Ticket in any Licensed Lottery shall not exceed £5." Well, evidently there wasn't much of a gap between the commission offering that in the licence, which came into effect in March 2011, and offering prior written consent to make a £10 ticket exist, which must surely have happened well before the May 2012 start date of the £4 million game. It's also interesting that Schedule 5 specifies payback percentages to be within 50% and 75%.

I wonder whether either Camelot or the National Lottery Commission would come under the scope of bodies of which a Freedom of Information request could be made? It would be interesting to require Camelot to break down contributions to Good Causes from individual games, as opposed to the amalgamated 28% over their entire range, and it would be interesting to discover when the National Lottery Commission did give such prior written consent. In practice, I don't think I will actually go ahead and make these FoI requests; they'd be more muckraking than anything else, and I am dearly glad that FoI exists and don't want to make things more difficult for those with more genuine FoI requests than mine.

Possibly the most troubling part of the whole enterprise to me - and, remember, I'm starting from a fairly anti-scratchcard stance - comes in Schedule 4, which (not unreasonably) says that "The Licensee shall use reasonable endeavours not to market a Licensed Lottery that might encourage excessive play habits." Now my view - and I stress that I'm getting really subjective here - is that I'm getting uncomfortable here. The existence of a £10 ticket cannot do anything but encourage people to play it, even if only once for the novelty. I might consider a single £10 play to be excessive (and when the payback is so low - even for a 74% payback ticket which is crazily high for the genre! - then, in practice, I do) but others may not.

I've also seen the ticket discussed within an advertising feature within the Stockton Herald and Post as being "ideal for a gift or a treat", which is a form of wording that I consider uncomfortably close to upselling. I am deliberately not making any accusations here, not least because I suspect that Camelot would use considerably more cautious language, but I am opposed to the notion that a higher-stake card is any more of a treat than a lower-stake card. It bears too many similarities to the implication that gambling for high stakes is more fun than gambling for low stakes. Any operator who permits such a notion to continue is not, in my view, operating in good faith.

And finally, to undermine everything I've been saying, I only actually know of one person who has ever bought one of these £10 scratchcards. They won £100 from it, when winning £100 or more happens only 1.3% of the time. To make matters more galling, the only reason they bought the £10 scratchcard is that they had won £20 off a £2 scratchcard immediately before it, which I reckon only happens about 1.25% of the time! So this 10-for-1 twice-in-a-row double-up was probably a worse than 1-in-5,000 shot, but evidently spin-ups of this type do happen from time to time. Either that, or gamblers don't tell you about the ones they don't win...

Please redirect any comments here, using OpenID or (identified, ideally) anonymous posting; there are comment count unavailable comments to the post already. Thank you!
Current Mood: uncomfortableuncomfortable

 


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