Lack of regulation, black market dragging on Asia’s lottery growth

Regulation in Asia is failing to keep pace with technological advances in the lottery industry and is weighing on the region’s potential, insiders say.

In China for example, firms are still waiting for new rules to allow online sales after the market was shut down in March 2015 amid widespread reports of corruption. Sports lottery operator 500.com was one of the firms to suffer from the fallout, having initially been one of two companies authorized to take part in an online lottery pilot program.  

However, industry insiders say the Asian lottery sector still remains an attractive proposition. Korea has a vibrant lottery market, while in Japan there is huge opportunity to expand the lottery’s current product offering online. The Philippines lottery industry continues to expand albeit at a moderate pace, while Cambodia has taken tentative steps towards launching an online and mobile lottery, the Khmerlottery, through telecoms company Cootel.

“Many online behemoths are positioning themselves for the market or are already capitalizing on it,” says John English, CEO of WEBE Gaming. “Global firms like Ali Baba, Tencent, 500.com and many others are acquiring, merging, or developing online lottery products. US, Israeli and European suppliers are already at the table; Scientific Games has been established throughout Asia for many years, as has IGT. Companies from around the world are looking to get established in Asia and I don’t expect that to slow down anytime soon,” he adds.

These firms undoubtedly have China in their sights, but in the near to mid-term, second tier countries such as Cambodia and the Philippines may offer more upside while the government decides whether to reopen the online market. Those who bring innovative tech and new game formats will be in the driving seat, but the challenge is to adapt these products to comply with the patchwork of rules and regulations across the various jurisdictions.

For countries yet to establish a legal and regulated lottery, some argue that online and mobile should be their first port of call.  

“Different lotteries have different requirements,” says Laura Pearson, spokesperson for Camelot Global. “For a new lottery such as Cambodia it would make sense to go straight to mobile. They can go live more quickly and cheaply as they don’t have a retail roll out to consider. Mobile is also a massive growth area; it’s the UK lottery’s fastest growth channel. But retail is incredibly important for brand awareness, accessibility, reaching players and communicating jackpots. So although it makes sense to start a lottery via mobile, you need to build up a retail presence to support it.”

A closer look at Cambodia

Cambodia is the latest jurisdiction to launch an online/mobile lottery, with the Khmerlottery going live back in May. Players are offered five digit games, with seven digit games set to be rolled out at a later date. At launch, the firm said it had chosen an online/mobile platform due to the increasing adoption of smartphone devices across the country – in 2015 smartphone penetration was 40 percent, up 51 percent on the previous year – and to help improve technological infrastructure in the country. The lottery has yet to release any financial results, but English says there have been “infrastructure and connectivity challenges.”   

“These challenges are the same as in many jurisdictions in Asia, but with the growth in the telecom and satellite sectors, it is becoming more of a reality from a technical standpoint. There are some great online companies pursuing the Asian region like a modern day gold rush,” he adds.

Another concern in Cambodia, and across similar jurisdictions, is market size and dwindling return on investment as more firms looks to enter the sector: “Cambodia has issued numerous lottery licenses in recent years, but profitability remains elusive as a market the size of Cambodia is only really able to support a single lottery,” says Mike Conforti, president of global strategic accounts at Scientific Games. “Therefore, it is unlikely that Cambodia will create a vibrant lottery until such a time as it issues regulations based on global best practices,” he adds.  Another hurdle is, of course, the black market, which in Asia is worth billions of dollars per year. Conforti says the black market is “enormous” and has a major impact on the viability of other forms of legal gambling. “With several notable exceptions, the region’s regulatory policies are suboptimal for lottery and gaming growth. Many jurisdictions offer very few products (Malaysia) while other jurisdictions offer too many licenses without sufficient protections (Cambodia), and others have tax and retail structures that prevent the implementation of high price point products (Vietnam),” he adds.

Time to innovate

While much of the above is out of the control of operators and suppliers, they can at least take charge of their product offerings. Indeed, innovation is a must in many second tier Asian lottery markets where only a handful of games are offered. Japan, for example, could benefit from a more concerted effort to develop instant ticket games; when it comes to online products, social and sports-focused games are becoming increasingly popular. Chinese firm, TCM, for example, has developed and launched an in-play social betting app for sports lotteries.

“Innovation is alive and well in the lottery industry,” says English. “And as time goes on the mergers with the high tech online companies with hundreds of millions of daily users combined with the appeal of sports and lottery will be a winning formula for the Asian market,” he adds.

Conforti is equally optimistic for the long-term potential, but says there is still work to be done: “Innovation certainly exists throughout the lottery and gaming industry, but its wide scale adoption is severely limited by regulatory policies that were adopted at a time when offerings were limited to bricks-and-mortar retailers with a narrowly defined product mix. The key to incremental growth in Asia is the approval of regulations that recognize best practices, foster competition, and promote partnerships between the jurisdictional operator and the global supplier.”

In short, it’s time for the Asian lottery sector to adapt and capitalize. The market offers huge untapped potential; it just needs a regulatory framework in place to allow it to be unlocked proper.