Examination of Witnesses (Questions 110
- 119)
TUESDAY 20 JANUARY 2004
CAMELOT GROUP
PLC
Chairman: Welcome. It is very nice to
see you. Welcome to you in your new capacity, Mr Grade. You have
a dazzling range of responsibilities. I hope that you found the
Chancellor's reference to film incentives in the pre-budget statement
to your taste.
Q110 Michael Fabricant: It may have
been my imagination but I thought I saw your three faces blanche
at Derek Wyatt's suggestion that maybe there should be an auction
to decide who should get the next franchise. Was I imagining it?
Mr Grade: No. Clearly, from the
evidence of the National Lottery Commission, they have looked
carefully at the risk/reward ratios of what an auction would produce
and have set their face against it. They do not feel that the
benefits would be forthcoming. In a sense, there was an auction
last time. On the result of the competitive bid for the last licence,
people do conveniently forget that Camelot has faced competition
twice for its licence, very robust competition in the last example,
and there was, in a sense, a bid and Camelot's bid reduced its
profit retention by 50% in its second licence bid. So there was
in fact an auction downwards in terms of retained profit.
Q111 Michael Fabricant: Has that
drop in profit resulted perhaps in a little less ability to adapt
games and do internal research, possibly explaining why the amount
of receipts on the Lottery has declined so much? I have some figures
here. Back in the late 1990s, people were gambling, if that is
the word, £140 million a week, and that has now fallen to
less than £90 million a week. Why is that? Is that because
of fatigue? Is it because of lack of variety in games?
Mr Grade: I do not think there
is any rule in any business that says that a business can consistently
grow year in year out for ever. All businesses go through periods
of growth, periods when they are flat, in slight decline and so
on. The important thing is where the trend is today. The trend
is very much healthier than it was. Perhaps I could turn to the
Chief Executive, Dianne Thompson?
Ms Thompson: There are several
points wrapped up in the question that you asked. You started
off by saying, "Is it the fact that we only have half the
amount of profit available to us in the second licence we had
in the first that impacts on sales?" Absolutely not at all,
and in fact what we committed to in our second bid was that over
the seven years of the second bid my shareholders would invest
over £1 billion in the National Lottery. We also committed
to having a minimum marketing spend for each of the seven years
of the second licence, whereas in the first licence it was only
in the last three years. We are investing far more in the games.
What has actually happened is that when we launched the National
Lottery, our weekly sales were in the order of about £48
million a week. Mr Wyatt did ask earlier if there is a lot of
confusion in the marketplace. To be frank, my answer is: the people
who are confused are the people who do not play. You will find
that our players actually totally understand the games and they
will play various games, depending on how lucky they are feeling,
whether they are chasing the big prize or they are wanting more
frequent odds of winning. When we launched we were selling about
£48 million a week. You are absolutely right, that peaked
in about 1998. I think we had one week when we were in that order
of about £140 million a week; it was actually about £100
million at the run rate. We have been down a lot lower. We are
now back at a steady £85 million a week. For the last three
quarters, we have been absolutely rock solid. Our sales are at
£1.1 billion. We have a huge new game launching in February.
Our financial year is fiscal. If that launch goes well, which
fingers crossed we would hope it would, then there is a very good
chance that we will finish this year level against last year,
which will be the first time for six years, and we will be back
in growth next year.
Q112 Michael Fabricant: You mention
that there is only confusion among those people who do not play
the game, but then that implies that you have a particular universe,
if you like, who gamble with your regularly but, because of that
confusion, you are unable to expand your market share. First of
all, what is the percentage of the population over the age of
16, roughly, who actually play the Lottery regularly? If this
confusion does exist, how are you going to expand that percentage?
Ms Thompson: As I think Ms Black
mentioned in her evidence, the reason the UK National Lottery
is one of the most successful in the world is that we still have
70% of the adult population playing on a regular basis. We have
been criticised occasionally for being low in the per capita
stakes as to the amount that each player is spending; we rank
at 47th at the moment. To be frank, that is a position of which
I am very proud. I would much rather we have millions of people
playing, spending relatively small amounts of money, than in some
lottery markets a very small percentage of the population spending
extremely large amounts of money. On a typical Saturday, probably
about 30 million people have a ticket for the main draw and the
Saturday Lotto draw is still by far the biggest game that we have.
Q113 Michael Fabricant: You heard
the Chief Executive of the National Lottery Commission talk about
there being possibly competition in the future and saying that
she would like to see perhaps there being some sort of complementary
service between the different companies, so that you are not duplicating
each other's effort. How do you react to that?
Mr Grade: The multi-licence proposal
from the NLC is, I think, a serious threat to future returns to
good causes. I do not think that the NLC has offered any evidence
otherwise that it will have the desired effect. They work on an
assumption that there is going to be no competition for a single
licence. We join the growing band of people, some of whom have
given evidence to this Committee, and of interested parties who
all believe that a multi-licence approach is going to have the
opposite effect and is the least attractive way of creating a
bidding opportunity. They have offered no evidence whatsoever
to support their assumption that Camelot is likely to be the only
bidder next time for a single licence. Other interested operators
have said the opposite. The last two points I would make are that,
as a result of a multi-licence approach, you will end up, because
of the conflicts that are inherent in arguing about the windows
of opportunity for marketing, the use of the infrastructure and
so on, with the National Lottery Commission de facto as
the operator of the National Lottery, skills for which they were
not appointed. Lastly, I think this decision is so big and so
important that in the end it is a decision for Parliament and
not a decision to be left to the wide discretion of the regulator.
Q114 Michael Fabricant: With respect,
one might say, "Well, you would say that, wouldn't you?"
That does not necessarily mean to say that you are not correct.
I wonder whether one of you, maybe Michael or someone else, would
just go into a little more detail as to why you think that competition
would reduce the amount of money going to good causes rather than
the monopoly that you currently enjoy.
Mr Grade: If I may, I will ask
Dianne Thompson to answer that, but I would like to say, in response
to "Camelot would say that, wouldn't they?", that we
are not the only people saying it. Some of our biggest competitors
are saying exactly the same thing. Perhaps Dianne could put some
flesh on that particular point.
Ms Thompson: I think there is
a difference between competition for the markets and competition
in the markets. I think the Committee has had sight of some independent
work that we undertook on that. We were in a very tough competition
both the first time round and the last time round. What have not
been taken sufficiently into consideration are the changes that
were made for hand-over at the end of the second licence from
the first licence. There was a very strong feeling at the end
of the first licence that Camelot was in a very strong, incumbency
position. That is no longer the case. The changes that were made
in the second licence by the NLC were to prevent that happening.
In fact, I would argue that our incumbency value, apart from the
fact that we will actually have experience of running it, in terms
of terminals, IPR, retailer databases, all the things that the
incumbent had last time, we will lose. If we had competition in
the situation where the incumbent had such a huge advantage last
time, then it is very difficult to see that there will not be
any competition for a single licence where the incumbent has very
little advantage from that perspective. The reason why I believe
multiple licences will be very harmful is that there is inevitably
going to be cannibalisation; every game we launch, virtually,
has a cannibalistic effect on some of the others. Therefore, we
manage that over time. I was saying earlier that we are launching
a big game in February. That game will be designed to have big
jackpots, which will cannibalise Lotto at certain times. Therefore,
the management of those two games is critical to make sure that
we minimise that cannibalisation. Jackpot control is also very
important. Despite what people say, and all the time people say
to me that we should cap the jackpot at £1 million a week,
the reality is that when we have a rollover or a super-draw, our
sales go up significantly because people say one thing and do
something else. Therefore, anything that splits that level of
jackpot by having three or four competing on-line draws will,
in the long term, also reduce sales. Then there are other issues.
If you have three operators, somebody operating, for example,
scratchcards and somebody else doing the on-line games as we do,
who has the responsibility for the National Lottery brand? At
the moment, it sits with me and I am beholden to look after the
long-term interests of the National Lottery as well as market
Lotto, Thunderball, HotPicks, whatever else the games may be.
I think you will end up with a lack of investment in the brand
and a lot of investment in individual operators' own games. Then
of course you get economies of scale. In an average year, we would
spend something like £75 million on marketing. If you had
three operators, each committing to spend £25 million on
marketing, you would still get to £75 million but the buying
power of three times £25 million is a lot less than 1 times
£75 million. I think it will lead to the loss of economy
of scale and increases in cost; therefore, it will reduce returns
to the good causes.
Michael Fabricant: That is a very useful
answer.
Q115 Derek Wyatt: I am proudly wearing
the 2012 badge this morning and I am going to concentrate on the
Olympics. Some of the other sporting bodies are, it would be fair
to say, nervous about what might happen to their grants. Can you
just reassure us that there is going to be an Olympic Lottery
but there will not be a take-out of the sport lottery per se,
or will there?
Ms Thompson: May I start with
that and then I will pass to Tony Jones to go through the figures?
As far as the Olympics are concerned, we are very committed, as
the operator of the National Lottery, to support the bid. We have
done some research amongst our players and almost universally
the length and breadth of the UK there is great support from our
players for Olympic Lottery games. Our ideal plan would have been
to launch them in time for Athens this year but the IOC has ruled
that we cannot do any Lottery games until we know whether Britain
actually has won the right to bring the games to London in 2012.
Of course there will be some cannibalisation from existing games
because virtually every game that we do has some cannibalisation
and it depends on the nature of the game as to what that level
is. Tony Jones will take you through the modelling we have done.
Mr Jones: We have done some work
and presented a programme to Government such that we will commit
to raise £750 million for good causes from specific, hypothecated
Olympic Lotteries. Of that amount, just over half will represent
amounts that would come from other games or, in other words, from
other good causes. About half of the amount that we raise would
effectively come from other good causes.
Derek Wyatt: If that document is not
confidential, maybe we could look at it? If it is, maybe we could
look at it under confidentiality, so that we can assess it? Am
I right in saying therefore that 50%—
Chairman: Could I interrupt and say that
I would remove those "maybes".
Q116 Derek Wyatt: Therefore, 50%
goes from the good causes, and that is equally from five separate
causes, and so £750 million will come out of those five over
five years?
Mr Jones: Effectively, it will
not be £750 million; it will be half of that that will actually
be split between the good causes in the ratio that the good causes
receive the money, because of course Camelot contributes its funds
to a National Lottery Development Fund, and then there are specific
formulae according to how much—
Q117 Derek Wyatt: In plain English,
can you tell us approximately how much you think would be lost
from those causes as a result of the Lottery?
Ms Thompson: That figure is £375
million, which is half the £750 million we have been asked
to raise. However, I have to say that we have taken a worst case
situation there because we have assumed that we do not get any
new players into the game because of the Olympic theme. Our research
would indicate that these games, because there is a hypothecated
good cause, would appeal to some people who do not currently play.
We have taken a worst case position, and of course that is £350
million over a seven-year period.
Q118 Derek Wyatt: That is £50
million a year?
Ms Thompson: It is of that order.
Q119 Derek Wyatt: It is still substantial.
Mr Jones: It represents about
5% of the total amounts that go to good causes. In any one year,
about £1.3 billion goes to good causes.
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