Memorandum submitted by Camelot Group
plc
1. INTRODUCTION
1.1 The National Lottery was established
by Parliament through The National Lottery etc Act of 1993 which
was amended by the subsequent National Lottery Act 1998. These
Acts set out the overriding duty to ensure fitness and propriety
in The National Lottery, to protect the interest of participants
and subject to these two conditions the duty to maximise returns
to good causes.
1.2 Since The National Lottery was launched
in November 1994, more than £14 billion has been raised by
lottery players to fund the five original Good Causes designated
by Parliament, developing the country's heritage, arts, sport,
charities and special projects for the millennium. The 1998 National
Lottery Act added lottery funded projects in health, education
and the environment as an additional Good Cause. Collectively,
the lottery has funded more than 154,000 projects across the United
Kingdom, which represents one of the largest programmes of civic
regeneration since the 19th Century.
1.3 The demonstrable success of The National
Lottery has been achieved within the parameters of Camelot's obligations
to protect players and vulnerable groups. Working with the National
Lottery Commission, GamCare and other stakeholders, Camelot has
developed and launched a portfolio of lottery products, each of
which have been tested against a dedicated Game Design Protocol.
Camelot was the first company in the UK to receive special GamCare
accreditation for its interactive service. And Camelot has also
developed its own "Project Child" campaign, whereby
10,000 test purchase visits to lottery retailers are made annually
in order to ensure that lottery products are not sold to the under-16s.
There are three measurable outcomes of these and other player
protection initiatives. They are:
— Per capita spend: While the
lottery in the UK remains at the top of the world league table
for total lottery sales, the UK is ranked just 47th in the world
in terms of per capita spend on lottery products. In short, Camelot
has maximised returns to Good Causes by encouraging a very large
number of players—around 70% of the adult population—to
spend a relatively modest amount of money.
— Underage play: In the context
of the Project Child campaign, Camelot records the percentage
of lottery retailers who refuse to sell lottery products on the
first visit from a Camelot representative and of those who subsequently
pass the test on the second visit.
— GamCare Helpline: GamCare
report that only 0.7% of the calls they receive on their helpline
relate to problem gambling linked to lottery products.
1.4 Together with the National Lottery Commission,
Camelot shares a third overriding obligation to maintain the propriety
of the lottery and all of the games that fall within the lottery
portfolio. Since launch in November 1994, there has been very
high public and player confidence in the integrity and propriety
of the operation of the lottery.
1.5 In addition to our overriding and statutory
obligations in these three crucial areas, the last nine years
has seen Camelot pay over £5 billion in lottery duty to the
Exchequer. Overall, 40% of all lottery revenues—nearly £20
billion—has been returned to society through contributions
to the Good Causes and lottery duty, making the UK lottery one
of the most successful and generous in the world. Camelot has
also paid out over £21 billion in prizes and £2.2 billion
in retailer commission.
1.6 Camelot has been able to achieve this
by operating one of the most cost efficient lotteries in the world
with only 4.5% of lottery revenue needed to fund the operation,
compared to average operating costs among the European lotteries
of 14%. Taken over the nine years since launch, this represents
an additional £3 billion for players and good causes.
1.7 Camelot's shareholders have a return
on their investment of just 0.5% of total lottery revenues. In
short, for every £1 of profit received by Camelot's shareholders,
our retailers receive £10 in commission for selling lottery
products, the Exchequer receives £24, the Good Causes receive
£56 and £100 is given away in prizes.
1.8 It is against these three overriding
objectives—maximising returns to the Good Causes, protecting
players and ensuring propriety—together with the broader
performance of the lottery since its launch in 1994, that any
proposed changes in public policy should be measured.
1.9 As such, Camelot welcomes this opportunity
to submit evidence to the Select Committee inquiry into the Third
Lottery Licence, and has already been actively involved in the
Government's wider consultation process over the last two years.
Camelot's specific observations about the Government's proposals
for the Third Licence, together with our responses to the individual
questions set out by the Committee, are outlined in the next section
of this submission.
2. WILL THE
PROPOSED CHANGES
ULTIMATELY LEAD
TO MORE
RESOURCES FOR
GOOD CAUSES?
2.1 Camelot fully embraces the principle
of competition for the market. The bidding process for the first
two lottery licences was intensely competitive, which helped generate
fresh ideas about how to launch and then develop the lottery and
which, in part, have helped drive its enormous success in maximising
returns to the Good Causes.
2.2 Furthermore, the provisions of the current
licence—notably in the area of intellectual property rights—have
greatly improved competition for the market and have eradicated
the economic advantages of incumbency for the next bidding process.
2.3 Moreover, the lottery differs from most
normal areas of business where competition policy seeks inter
alia to widen the range of products available to consumers
and to reduce prices. By contrast, as a Government licensed activity
with a dedicated public policy purpose, greater competition within
the market will deliver few if any benefits but could seriously
undermine the lottery's ability to maximise returns to the Good
Causes.
2.4 The Committee has had sight of a report
from the independent consultancy Frontier Economics, which was
commissioned by Camelot. The report found that the funds available
to Good Causes depend upon the economic value of the lottery (defined
as the net value of lottery sales less costs) and its distribution
between licensees and Good Causes.
2.5 Allowing a number of operators to run
different parts of The National Lottery could result in lower
net lottery sales revenue and higher costs, compared with those
achieved by a single operator. This in turn would reduce the economic
value of the lottery, thereby reducing returns to Good Causes.
By contrast, a single operator has both the incentive and the
ability to develop the lottery more efficiently than multiple
operators. Frontier has highlighted a number of specific ways
in which the economic value of the lottery could be undermined
with multiple and competing operators:
— licensees may develop products that
cannibalise rivals' sales rather than expand the market;
— product launches may be undermined
by a lack of co-ordination between licensees;
— free-riding by some operators may
result in under-investment, notably in the lottery brand and infrastructure;
and
— there may be a loss of economies
of scale and scope that cannot be effectively remedied by access
agreements and the sharing of infrastructure, which would increase
total operating costs.
2.6 Camelot therefore believes the Government's
proposal to empower the National Lottery Commission to licence
and regulate multiple lottery licences from January 2009, could
pose a very serious threat to the overall ability of The National
Lottery to maximise returns to the Good Causes. Camelot further
believes that the future structure of the Third Lottery Licence
is a sufficiently important aspect of public policy for Parliament
to take a definitive view, as opposed to delegating responsibility
to the National Lottery Commission.
2.7 Camelot also believes that there are
other ways in which Government, Parliament and the National Lottery
Commission could more effectively apply the principles of competition
policy without reducing the number of potential bidders in the
next licence or damaging The National Lottery's ability to maximise
returns to the Good Causes. We would be particularly keen to explore
ways to enhance the lottery operator's ability and obligation
to make best use of competitive tendering and procurement arrangements,
which are in common use throughout the public and private sectors
to harness the virtues of competition to specific policy objectives.
2.8 There is a wide range of additional
threats and complications posed by a multiple licence system,
which are set out in our response to question 5 (below).
3. IS THE
NATIONAL LOTTERY
COMMISSION THE
RIGHT BODY
TO REGULATE
THE NATIONAL
LOTTERY?
3.1 Camelot has always maintained that a
dedicated regulator for The National Lottery best reflects the
unique public policy purpose of maximising returns to Good Causes,
in the context of player protection and propriety. We have consistently
cautioned against the inevitable internal tension which would
be generated under the single regulator model, between The National
Lottery's primary purposes and the interests of the wider gaming
and gambling industry. Providing that Government, Parliament and
the National Lottery Commission (NLC) determine that a single
operator model remains the most effective and productive way of
structuring the Third Licence, then Camelot can see no reason
to revise this policy position.
3.2 However, the demands on a regulator
supervising a multi-licence model would be of a quite different
order from the current requirements. In many respects the regulator
would need all the commercial skills of an operator in making
timely judgements on marketing and launch dates; in evaluating
the potential for cannibalisation between the products of different
licensees; and in adjudicating in matters of dispute between competing
operators.
3.3 Camelot does not believe that the NLC—as
it is currently structured and resourced—is necessarily
equipped to conduct the bidding process for multiple licences,
nor the inevitable and far greater role that the regulator would
then be expected to take in making commercial decisions currently
made by the single operator. It is therefore very difficult to
determine how best to structure regulation in the Third Lottery
Licence until we have a clearer idea of what the licence structure
itself will look like.
3.4 But regardless of the eventual regulatory
structure, it is essential that the NLC (or its potential successor)
is statutorily equipped to adequately monitor the line that separates
The National Lottery from the activities of purely commercial
gaming and gambling operators. In order to do this, Camelot believes
that the forthcoming Gambling Bill should include the following
components:
— Gambling Commission Board: The
lottery regulator should automically have an ex officio member
sitting on the main board of the Gambling Commission in order
to highlight the potential impact of deregulation in the wider
gaming and gambling industry on the lottery's ability to maximise
returns to Good Causes.
— New Statutory Responsibility:
Both the lottery regulator and the Gambling Commission (if
they are not one and the same after January 2009) should have
statutory responsibilities to assess and take account of the impact
of changes in the regulation of the gaming and gambling industry
on the ability of The National Lottery to maximise returns to
the Good Causes.
3.5 Camelot and The National Lottery operate
in the most heavily regulated part of the gaming and gambling
industry. This does not necessarily mean that it is the most effectively
regulated sector. In a continuously modernising gaming and gambling
market, it is important that the lottery regulator is flexible
and evolves its regulation at the same rate as the market.
3.6 Camelot believes its ability to maximise
returns to Good Causes will require the establishment of a more
responsive regulatory regime at the earliest opportunity, and
that this should be acknowledged in the full and final draft of
the Gambling Bill.
4. SHOULD THE
RESPONSIBILITIES FOR
AWARDING LICENCES
ON THE
ONE HAND,
AND REGULATING
THEIR IMPLEMENTATION
ON THE
OTHER, BE
DIVIDED BETWEEN
DIFFERENT BODIES?
4.1 The regulatory authority that awards
licences must have a thorough understanding of the lottery business
and the wider market in which it operates. Therefore, the regulatory
authority that is responsible for ongoing regulation of The National
Lottery and its operator should also be responsible for awarding
licences. A regulatory authority should not be able to disassociate
itself from the consequences of the decision to award a licence
to a particular operator.
5. WHAT ADVANTAGES,
DISADVANTAGES OR
RISKS ARE
THERE IN
A SYSTEM
OF MULTIPLE
LICENCES FOR
DIFFERENT ASPECTS
OF LOTTERY
OPERATION POTENTIALLY
RUN BY
DIFFERENT COMPANIES?
5.1 Camelot believes that a multiple licence
system would pose a number of significant risks to the operation
of The National Lottery. We set out below those key activities
currently executed by a single operator that would be most at
risk:
— Game Plan: International experience
clearly demonstrates that the only way to maintain long-term growth
in total lottery sales is to build a diverse portfolio of games
which are periodically refreshed to maintain the interest of players.
Such a portfolio requires very careful management to minimise
the cannibalisation of existing products and player confusion.
The success of such management depends on the control and balance
of the substitution of play, which in turn determines the long-term
health of the lottery as a whole. Under a multiple licence structure,
management of the overall game plan would be undermined by the
demands of competing operators, which would have the rapid expansion
of their own game plans as a primary objective, at the expense
of The National Lottery portfolio as a whole. Alternatively the
lottery regulator would bear the responsibility of making the
essentially commercial decisions about which operators should
launch which games at which times. Camelot does not believe that
either of these two options would be in the interests of a healthy
National Lottery.
— Marketing and Brand Management:
The single operator model has produced an extremely effective
marketing and brand strategy, based on a complex, co-ordinated
and long term plan. If each of the existing National Lottery product
brands were ranked by sales against all other FMCG brands in the
UK market, Lotto would be ranked first, scratchcards second, Thunderball
third and Lotto HotPicks fourth ahead of Pepsi Co and Coca Cola.
The National Lottery's latest product launch—Daily Play—entered
the UK top 10 brands after only one week. As with the game plan
(above) multiple and competing lottery operators would be driven
primarily by the commercial imperative to market their own games
and not by the need to tailor them to this wider strategy. Again,
the only way to mitigate this risk would be to empower the lottery
regulator to co-ordinate all marketing and brand management. Camelot
does not believe that the regulator would be best equipped for
this task.
— Jackpots: Multiple operators
launching several draw-based games would run the risk of cannibalising
lottery revenue, thereby reducing the potential size of jackpots
for each of the draw-based games. Camelot has nine years of detailed
financial data which unequivocally demonstrate that the size of
the jackpot has a direct and positive link to sales performance.
A multiple licence structure runs the risk of fragmenting jackpots
across several competing draw based games, depressing total sales
and therefore returns to the Good Causes.
— Interactive Strategy: Both
the Government and the NLC have indicated that they could envisage
issuing a dedicated lottery licence for the operation of interactive
lottery games. However, the interactive strategy for The National
Lottery is primarily a means of widening consumer access to existing
lottery products through the internet, interactive television
and mobile telephony. The interactive division is essentially
a channels and platforms operation and not a stand-alone business
in its own right.
— Retailers: Lottery products
are sold primarily by some 33,000 retail outlets across the UK.
Even with the launch of interactive services (see above) Camelot
still expects at least 90% of total lottery sales to come from
the retail estate. However, National Lottery retailers have already
expressed serious concerns about how they would co-ordinate game
launches and in-store activity—including timing and location
of point of sale material—under a multiple licence structure.
Retailers have also expressed concerns about the potential requirement
for additional terminals in the event of multiple operators. Camelot
shares the concerns of retailers about the ability of multiple
operators and the lottery regulator to co-ordinate activity across
the retail estate.
— Information Technology (IT): The
secure operation of games in a modern lottery is a fundamental
part of the success of that operation and the integrity of these
systems is paramount to maintaining public trust. Some basic functions
can be contracted out (eg the maintenance of the terminal network).
However, the integration and testing of gaming systems is critical
and must be under the direct control of a single operator. Again,
the only way to maintain this necessary control in a multiple
structure would be for the lottery regulator to take on the responsibilities
currently held by the single lottery operator.
— Support Service: The single
operator currently delivers a comprehensive support service for
both retailers and players, through dedicated helpline and call
centre operations. Under a multiple licence structure, the competing
operators would either have to provide their own (costly) duplicate
services or they would have to co-ordinate services—under
the supervision of the lottery regulator.
5.2 In short, a system of multiple licences
would pose a serious threat to the operation of The National Lottery.
In each case, the only way to mitigate these threats would be
the frequent and pervasive intervention of the lottery regulator
in areas that have to date been the responsibility of the operator.
In effect, the lottery regulator would become de facto operator
of The National Lottery.
5.3 Some of Camelot's European counterparts
currently operate under a multi-licence structure. In Italy, operators
bid for licences and in some cases actually share the licences
for certain games. However, significant legal issues have arisen
as a result. Italy's largest operator, Lottomatica, won licences
to operate scratchcards in 2000, but is still yet to launch due
to legal challenges from their commercial rivals. There have also
been legal disputes about the length of licences for some game
categories. Camelot does not believe that the experience of those
few multiple licence structures in overseas jurisdictions bodes
well for a UK lottery market based on a similar model.
6. WILL MULTIPLE
LICENCES INCREASE
COMPETITION? SHOULD,
AND/OR
COULD, ANY
TENDER ARRANGEMENTS
INCLUDE A
MECHANISM TO
PREVENT ONE
COMPANY WINNING
ALL AVAILABLE
LICENCES?
6.1 The value of competition for and within
the lottery should solely be to enhance the returns to good causes
as set down by Parliament in the 1993 and 1998 Acts. In the past,
competition for the licence was manifestly designed to seek out
the operator most able and likely to maximise those returns.
6.2 As noted in 2.2 (above) there have been
significant improvements to the bidding process that will enhance
competition for the third lottery licence. Firstly, under the
terms of the second Section 5 Licence, many of the key enablers
for transition will be owned by the NLC at the time of the next
bidding round. For example, the databases of players and retail
outlets will be the property of the NLC. Future bidders will therefore
have full knowledge of the existing distribution infrastructure
to help formulate their plans. There will be data on the current
performance of the lottery in the marketplace to inform the bidders
assessment of the market. The data which is now available to bidders
will mitigate much of the bid cost inherent in the first two rounds.
And any new operator will have the right to acquire Camelot's
existing specialist terminals.
6.3 The Frontier Economics report challenges
the assumption of both DCMS and the NLC that Camelot is likely
to face limited, or even no competition in the bidding process
for a single licence. The changes made to the conditions of the
Second Lottery Licence (see above) will significantly reduce or
remove any incumbency advantage enjoyed by Camelot. Frontier does
not believe that Camelot has any significant brand advantage,
exclusive contracts or relationships, or any proprietary technological
knowledge that would inhibit competition. A further important
factor is that the lottery will be more mature and hence easier
to value in 2009 than at previous bidding rounds.
6.4 Moreover, the multiple licence option
is likely to narrow and undermine competition in the third bidding
round in two significant ways:
— Small Bidders: According to
Frontier it is possible that a company bidding for all (or most)
of the licences would be able to take advantage of synergies between
the licences and outbid small competitors bidding for single licences.
In this case, small bidders could be deterred by this "large
operator" advantage and may rationally decide not to enter
the competition in the first place. The NLC could guard against
this by reserving licences for entrants or small bidders, but
this would run the risk of imposing an inefficient outcome to
the detriment of the development of the lottery, and running counter
to the primary legislative objective of maximising returns to
Good Causes.
— Complexity Narrows Competition:
The multiple licence option makes the operation of the lottery
considerably more complex and is likely to give the future lottery
regulator a more central role in making crucial commercial decisions
that have until now been made by the operator itself (see section
5 above). As a result, the Government's current policy position—namely
to empower the National Lottery Commission to issue and regulate
multiple licences after 2009—is likely to reduce the number
of potential bidders in the next licence round. Indeed, immediately
after the Government made its policy announcement, Sir Richard
Branson and the Lord Mancroft publicly stated that they had no
interest in bidding in a multiple licence structure.
— Timing: In a multiple licence
scenario there is also the possibility that that the regulator
may introduce new licences—which introduce duplicate games—during
the currency of other existing licence, making nonsense of the
business plans of other operators.
6.5 In open markets competition policy seeks
to increase consumer choice and reduce unit prices. The structure
of the lottery differs in that the key legislative goal is the
maximisation of returns to Good Causes, subject to effective player
protection. As set out in section 2 (above) there are clearly
some forms of competition within the lottery market which—while
they might increase choice for consumers in the normal sense—would
also create operational risks, cost inefficiencies and reduce
overall returns to the Good Causes. We believe that the multi-licence
option falls squarely into this category.
7. WHAT WILL
BE THE
IMPACT ON
THE EXISTING
GOOD CAUSES
OF THE
OLYMPIC FUNDING
STREAM BEING
CREATED TO
PROVIDE RESOURCES
IN THE
EVENT THAT
LONDON WINS
THE 2012 BID?
HOW REALISTIC
ARE THE
GOVERNMENT'S
ESTIMATES?
7.1 Camelot supports The National Lottery's
involvement in the funding of the London Olympics 2012. There
is a clear synergy between the Olympics and the lottery, not least
because sport—at both elite and grass roots level—was
one of the original Good Causes designated by Parliament in the
1993 Act.
7.2 We have worked closely with the Government
and the NLC on calculations for how much The National Lottery
can raise to help the UK host the games in 2012. In total, The
National Lottery has agreed to raise £1.5 billion. £750
million will be diverted from the existing National Lottery Distribution
Fund (NLDF) and The National Lottery will raise a further £750
million based on Olympic-themed lottery games between 2004 and
2012. These figures are entirely dependent upon the early introduction
of games and the likely impact of the licence structure and regulatory
regime on The National Lottery's ability to maximise returns to
Good Causes going forward.
7.3 Camelot has researched a number of game
ideas and we are keen to introduce these games as soon as possible
so that we are able to raise the maximum amount in the time available.
We are however, dependent on the passage of legislation to enable
the first hypothecated fund. We believe that there would have
been benefits to introducing the Olympic-themed games in 2004
in order to tie-in with the Athens Olympics. However, it now seems
that it will not be possible to launch Olympic themed games until
London has won the bid in 2005 because of rules laid down by the
IOC.
8. THE DISTRIBUTION
OF LOTTERY
FUNDING
8.1 As the operator of The National Lottery,
Camelot rightly has no role in the distribution of lottery funding.
It would be wrong to confuse the defined role of the operator
with the distribution stream. However, we do believe that lottery
distribution has posed problems for the broader National Lottery
brand in the last few years.
8.2 Research carried out in April 2002 showed
that 53% of those asked were unable to say—even roughly—how
much The National Lottery had raised for good causes since it
began. Only 14% of adults made an estimate of over £1 billion
and 63% were surprised by the figure of £11 billion that
had in fact been raised at that point. Further qualitative research
undertaken in 2003 showed that players perceive lottery funds
to be "their" money. As a consequence we believe there
is a duty of accountability on the part of all lottery partners
to the public in general and to lottery players in particular.
8.3 Camelot campaigned for and co-funds
the new National Lottery Promotions Unit (NLPU). The unit has
overall responsibility for raising public awareness about the
154,000 projects funded by the lottery since 1994. Although independent
of any individual organisation, the Unit's work is overseen by
a Management Board comprising representatives from DCMS, Camelot
and the lottery distributors. Activities undertaken by the Unit
will be monitored and evaluated and the success and overall role
of the Unit will be reviewed in January 2006.
8.4 In November 2003, a campaign was launched
to raise awareness of lottery funding using blue plaques with
the crossed fingers logo. These plaques will appear on lottery-funded
projects so that the public can see exactly how and where their
money is being spent. Camelot has committed to funding the up
to 10,000 of these plaques, which will be awarded retrospectively
to celebrate the 10th anniversary of the lottery in November 2004.
9. THE TAX
NEUTRALITY OF
LOTTERY DUTY
9.1 In recent years the rest of the gambling
industry has moved to a gross profits tax regime, which initial
assessments by HM Customs and Excise (HMCE) have shown to be successful
for the industry. Camelot continues to pay 12% in lottery duty
and to date, The National Lottery has returned over £5 billion
to the Exchequer.
9.2 Camelot has been in discussions with
HMCE about the benefits of moving to a gross profits tax regime.
This would allow us to offer more competitive prizes on a number
of our products, where we are currently unable to offer the same
favourable rates as our competitors.
9.3 Early indications from econometric modelling
show that the changes in payout ratios for the games that Camelot
envisages following the introduction of GPT would lead to an increase
in total National Lottery gross sales over the remaining five
years of the second licence period and would be revenue neutral
to the Exchequer, whilst potentially raising additional funds
for the Good Causes.
10. ADDITIONAL
OBSERVATIONS
10.1 Camelot welcomes the opportunity to
submit written evidence and give oral evidence on 20 January.
We are happy to submit further evidence should this be required.
January 2004
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