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Although Michigan passed a full-scale online gambling bill in 2019, its citizens still have at least a year to wait before the first online sportsbooks, casinos, and poker rooms go live.
In the meantime, however, there is one iGaming option already available in the state: the Michigan online lottery.
Digital games and tickets are available through the Michigan Lottery, which has seen explosive growth since starting online operations in 2014. The net win on its iLottery products was just $600,000 in the final months of that debut year before growing to $18.5 million for its first full year of operation, then to $48 million the next.
Today, annual growth remains in the double-digit percentages. The state agency just released its 2019 financials, and it’s no surprise to see iLottery still outpacing traditional lottery products. In fact, its growth has accelerated from 2018 to 2019.
The continued success of the online lottery program was no doubt a factor in lawmakers’ decision to pursue other forms of iGaming in Michigan.
Last year was another record year for the Michigan Lottery, a continued product of steady annual growth. Although individual products have had their ups and downs, the last year in which the lottery did not post positive growth for ticket sales was during the financial crisis of 2011.
Total ticket sales in 2019 were $3.9 billion, up from $3.6 billion in 2018. From that gross revenue, the lotto paid out $2.36 billion in prizes. Factoring in those, retailer commissions, and other expenses, the state agency turned a net profit of $1.07 billion.
For the first time, the lottery brought in more than $1 billion for the state in 2019.
Nearly all of that ($1.05 billion) went to the state’s School Aid Fund. A small remainder was split between Health & Human Services and the state’s general fund.
Quantifying the contributions of online products to the lottery’s overall revenues is a bit tricky because of the way accounting is handled.
For its conventional products, the agency tallies gross sales first and deducts the prizes it pays out in a later step. For iLottery, however, it deducts prizes at the source and simply includes its net winnings alongside gross sales for other products.
The net win for online lottery games in 2019 was $116 million. Using the lottery’s official accounting, that amounts to just 3% of total sales. There was, however, $961 million in gross revenue and $845 million in prizes awarded.
If we want to compare apples to apples, we should really be including that prize money in total sales, as it is for physical products. Doing that gives us a total of $4.7 billion in sales rather than $3.9 billion, of which 20% comes from iLottery products.
On the other hand, that number overstates the iLottery’s contribution to net revenue, since it pays out far more generously than traditional products. Comparing sales to prizes, the iLottery’s return-to-player is around 88%. By contrast, instant scratch-off tickets pay out around 75%, quick-draw “Club” games around 65%, and traditional draws closer to 50%.
The fairest comparison, perhaps, is between iLottery’s net win and the gross margin of other products once prizes are deducted. Doing that, its contribution to the gross margin is 7.7%. If we also deduct retailer commissions from traditional sales and free-play promotions from iLottery, that number rises to 9.6%.
Whatever accounting we use, the takeaway is the same. The iLottery is currently a small — but not insignificant — part of the Michigan Lottery’s overall operations. More importantly, it could account for a much more important share of revenues within a few years at the pace it’s growing.
Total iLottery sales were up 25% in 2019. The margin was slightly down, so the net win was up slightly less with 24% growth. That’s significantly better than 2018, which was the slowest year of growth for iLottery sales since their debut. Even so, net win rose over 20% that year, far outpacing other categories of products.
Aside from the iLottery, instant-win scratch and pull-tab tickets are the fastest-growing lottery products in Michigan. Their growth has also been slowing somewhat over the past years, from 16% in 2017 to 11% in 2019. Traditional draw games have been growing more slowly, with sales increasing by 9.5% in 2019. Fast-draw Club games have been stagnant.
The only individual product to beat the iLottery’s overall growth was Mega Millions, which saw sales rise nearly 26% last year. That was thanks in part to a record-setting jackpot that reached $1.6 billion before a winner was found.
The rapid growth of Michigan iLottery products stems from several factors:
Michigan, it’s worth noting, only passed its gambling bill in the final weeks of 2019. Regulatory and licensing processes being what they are, that means there’s going to be a long wait before the first legal online gambling sites start taking wagers.
Retail sports betting, which the bill also covers, should begin within a matter of months. There was some initial hope that online sportsbooks might start opening in the second half of the year. The latest word, however, is that it won’t happen until next year.
Based on what we saw last year in Pennsylvania, online casinos and poker rooms could take even longer.
The most common argument that online gambling advocates face is that legal online sites will cannibalize brick-and-mortar gambling revenues. That worry is unfounded. A glance at Atlantic City casino revenue since online gambling began in New Jersey provides ample proof.
It’s considerably less certain, however, what impact online gambling will have on the iLottery and vice versa.
Aside from Michigan, only five other states have online lotteries at the moment: Illinois, Kentucky, Georgia, New Hampshire and Pennsylvania. Of these, only Pennsylvania has online casinos, too, and those only went live last July. The PA online lottery reports revenue annually and begins its fiscal year on July 1, so there’s not yet any data on the financial effects of the launch.
Prior to that rollout, land-based casinos in PA did express worries about the potential impact the iLottery would have on them. Specifically, they were upset that many iLottery products feature slots-like gameplay. Some even share a name or a theme with physical slot machines in use at land-based casinos.
Just before launching their online products, the casinos sought an injunction to force the lottery to stop offering those games. The court denied that request, however.
In all likelihood, though, the iLottery has more to fear from online casinos than the other way around. Commercial online casino products tend to have better production value and marketing than their lottery facsimiles. They also tend to have more generous payouts than the 88% currently offered by the Michigan iLottery.
The growth of iLottery sales demonstrates the appetite for online products among the gambling public in Michigan. Once the first MI online casinos launch, they’ll likely be the main beneficiaries of that demand.