Keeping It In-House: How Online Lottery Expansion Is Outpacing Online Casinos in the US

When it comes to legal online gambling in the US, there’s something of a footrace taking place between lotteries and casinos. Eight years in, it looks as if online lotteries are winning.

Retail lottery tickets and land-based casino games may be very different products, but the online experience blurs that distinction. Online instant “tickets” can bear more resemblance to video lottery terminals (VLTs) — and thus to slot machines — than they do to scratch tickets. Lawmakers interested in gambling expansion must therefore decide whether it’s sufficient to legalize just one or the other, or if it’s better to have both.

At the moment, there are only two states with active online casinos but no online lottery. Conversely, five states offer instant iLottery games but no online casinos, and two have both. This doesn’t include states which sell only draw tickets online, but lack instant games, as these aren’t comparable to online casinos.

Lotteries lead 2-1 in 2020, as casinos look to tie it up

The pattern this year echoes the larger trend. In May, new online lotteries launched almost simultaneously in Rhode Island and Virginia. West Virginia got its first online casino two months later. Depending on how the regulatory process goes for Michigan online casinos, we could get see the count tied up before the year is out.

Until this year, Virginia was among the states selling draw tickets online using a subscription service as a workaround to existing laws. Its sports betting bill, which passed in March, also gave the lottery explicit authority to sell tickets online at its discretion. Two months later, it launched a full-featured online lotto site, including slots-like instant games.

Rhode Island was more of a surprise. Although few outside of the legislature noticed it at the time, the 2019 sports betting expansion bill which allowed the lottery to launch a mobile sportsbook also gave it more general powers to enter into contracts with third parties to offer other sorts of online betting. Using those powers to launch an online lottery was more of a long-term plan, however, until COVID-19 forced the casinos to shut down. Establishing an iLottery therefore became a convenient way to compensate for that loss of revenue.

These are all the states that now have a full-featured online lottery, along with their respective timelines:

  • Georgia (2012)
  • Michigan (2014)
  • Kentucky (legalized 2013, launched 2016)
  • New Hampshire (2017)
  • Pennsylvania (2018)
  • Rhode Island (legalized 2019, launched 2020)
  • Virginia (2020)

Similar starting points

This choice between iLottery and online casinos has existed since the US first started to liberalize its position on online gambling. Indeed, the first successful iLottery bill and the first successful online casino bill passed just three months apart, in 2012.

That timing is no coincidence. Two important things happened in 2011 that served as a starting gun for the race. First, the gray market situation that had previously existed previously came to an end on April 15 that year, what is now known in the poker world as Black Friday. That’s the day that the Department of Justice (DOJ) issued indictments against the three biggest online poker rooms of the time and seized their domains.

Later that year, the logistics of legalization became easier, as the DOJ issued its opinion that the Wire Act applied only to sports betting. New Jersey had already made one attempt to pass an online gambling bill by that point. However, this interpretation of the Wire Act removed a major barrier that had previously caused most lawmakers to balk at the idea. It was really at that point that such efforts became widespread.

Illinois and Delaware led the charge the following year, passing bills for iLottery and online casino respectively. Georgia, which followed Illinois in creating an iLottery later in 2012, was the first to offer casino-like instant games. To this day, Illinois sells only draw tickets online, which is why it does not appear on the list above.

Why is iLottery the more popular option?

Every state is different, with its own set of concerns and complications. Even so, there are a few universal factors that may be swaying more legislatures towards establishing an iLottery rather than legalizing online casinos.

The first is simplicity. An online casino bill is necessarily complex, and most of these run for several dozen pages. Every detail needs to be taken into account, from assignment of responsibilities, to licensing procedures, to tax policies, to technical requirements. It’s also usually the case that a state’s senate and house each write their own bill. These will differ in the details, and then further work is required to reconcile them.

Paving the way to an iLottery, on the other hand, is usually as simple as changing a single phrase in an existing law. Often, all that is required is the addition of the words “including sales over the internet” to the section detailing the responsibilities of the lottery board. After that, legislators can move on to something else, leaving the details of the iLottery to the lottery commission itself.

The second reason is money. Tax dollars are the main incentive for any gambling expansion, yet with the private sector involved, inevitably some money has to remain with shareholders. Conversely, 100% of a lottery’s net profits end up in public coffers.

There are valid arguments the industry can make as to why private sector involvement is necessary. For instance, legal online casinos can compete with illegal offshore casinos in a way that an iLottery can’t. However, not all lawmakers will be receptive to these points. The argument about where profits are going is an easy one to follow, and hard to disagree with.

There are more than two choices

Of course, iLottery and online casino aren’t mutually exclusive. Some states are choosing a third path.

One option is to follow Delaware‘s lead. The compromise its lawmakers found was to legalize online casinos, but have them operated by the lottery. That was the natural solution there, because its land-based casino operate on the same principle. Rhode Island is a good candidate for following a similar path, since it has the same arrangement with its land-based casinos. It may not even need additional legislation to do so, as the same law which allowed to it launch its iLottery and mobile sports betting could cover casino games as well.

States which don’t have this sort of relationship with their casinos can implement both, but separately. Usually, this means iLottery first, because of its simplicity, followed by private sector iGaming later. This is what Pennsylvania has done, and what Michigan is in the process of doing.

The trouble here is that it can lead to a turf war. Online slots and instant iLottery games are sufficiently similar that they can’t help but encroach on each others’ market. In Pennsylvania, that has led to the casinos attempting unsuccessfully to sue the lottery for offering games too similar to their own slots. In Michigan, the lottery has thrown a wrench in the possibility of interstate gambling because it fears that large progressive jackpots on slots could cause sales to decline for the big interstate draws, like Powerball.

Those conflicts are resolvable, however. Having both is the most natural solution in the long run, and what we see in most western European countries. In the short term, though, simplicity is winning out in the US. For now, we can expect more states to start with iLottery and work towards online casinos than vice versa.

- Alex is a journalist from Dartmouth, Nova Scotia, Canada. Now site runner for Online Poker Report, he has been writing about poker and the online gambling industry in various capacities since 2014.
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