Examination of Witnesses (Questions 120
- 139)
TUESDAY 20 JANUARY 2004
CAMELOT GROUP
PLC
Q120 Derek Wyatt: When we did the
Dome, the only things we got wrong actually were the numbers.
All the experts said £12 million but only £6 million
came. If we were way out and we needed much more for the Olympics,
or in fact you did not raise the £750 million, the Government
would then be short of substantial amounts of money. How would
that interact? Have they got a right to come back to you and say,
"We need more" or is that just tough?
Ms Thompson: The timing is quite
an interesting issue anyway because we have identified that we
thought there were four key windows for marketing of the Olympics:
Athens obviously; summer of 2005 if we hear that we are successful;
Beijing; and then the three years post-Beijing when it is the
count-down to London. That probably is the most critical time.
Of course, that is 2009 to 2012, which is outside the second licence
period. There is an added complication there. We have developed
a whole variety of games, some of which are now out in research.
Like any game that we would launch, when we get nearer to the
launch date, if it looks as though it is not going to deliver
the amounts that we were forecasting, then we would substitute
it with something else. We are not short of ideas; in fact, we
have whole raft specifically for the Olympic Games.
Q121 Derek Wyatt: You have raised
an interesting point there about it being outside the next licence.
Does that mean you would own the copyright to these games and,
if you did not get the licence, then you would not sell them on
or you could not sell them on?
Ms Thompson: No. I think that
was the point I was making earlier to Mr Fabricant, that the incumbency
arrangements at the end of the second licence are quite different
from the first, and all IPR is owned by the National Lottery Commission,
so if Camelot were not successful to win the third licence then
another operator would just take over in a seamless transition.
Q122 Derek Wyatt: I expect you cannot
answer this question but it seems to me that if the government
and London wants the Olympics there is an issue about additionality
here; that you are being asked to raise £750 million for
something we want to do as a nation. Do you think that obscures
or confuses additionality? I can see you may not want to answer
that.
Mr Grade: I do not think it does,
if I may.
Q123 Chairman: Let's face it, it
is an absolute total distortion of the additionality principle.
It is raiding the Lottery and its good causes money for something
the Treasury might be expected to finance—if I may ask that
in the form of a question!
Mr Grade: The political nuances
of this debate are really not for Camelot. All we would say is
that for the health of the National Lottery we are very excited
about the potential results of a hypothecated special dedicated
cause for the National Lottery and we believe, if the bid is successful,
that this will have a very healthy effect on the National Lottery.
Q124 Derek Wyatt: Ironically the
Treasury will still take 12% of that.
Mr Grade: That is for them. Chairman,
may I just mention another point on the issue of shortfall? We
have obviously presented a worst case and we have been fairly
conservative. The fact is that Lottery sales and Lottery games
are very sensitive to regulation and we operate, quite rightly,
in a very strictly regulated environment, but there are many levers
in terms of a more liberal regulatory regime that would enable
us to boost sales in that event.
Q125 Alan Keen: Just quickly, on
the Olympic Lottery, presumably you did have extensive surveys
done because you are looking at people like me who have never
bought a Lottery ticket—however nice Camelot may be they
have never persuaded me to buy one—but I am a sports nut.
Would I buy an Olympic Lottery ticket or not? How many people
like me did you find would do that, because I have had a long
think about this and I still think I would give the money direct
rather than do it through the Lottery.
Ms Thompson: We were asked to
respond very quickly, as Mark Harris was saying, at first to the
DCMS and then we had the opportunity of doing more detailed work
in the summer, and we found a very high excitement. We were slightly
worried that people might think it was London centric but that
was not the case at all. You only have to look at what happened
with the Commonwealth Games to see as a nation how we got behind
that. We did find people who were not Lottery players saying,
"Oh, yes, if it was for the Olympics I would have a go",
but in terms of our calculation as to the impact on the other
good causes we did not build that upside into it.
Q126 Alan Keen: In answer to Michael
Fabricant you were saying very strongly that it would cause tremendous
confusion with the public and would damage the total income from
the Lottery if there were other people competing in the market
under the banner of the National Lottery. Are you saying, then,
that if government did go down that route, the National Lottery
Commission would not really have the expertise to be able to make
sure that damage was not done, that you would really need another
more technical body to oversee that, or would you just think it
would be such a shambles it was not worth doing it at all?
Mr Grade: I think the conflicts
would be unresolvable between the operators. If you, say, had
three licencees all scrabbling and arguing about software windows
to get to retailers to get new games in and so on, you would have
a Lottery regulator making very sensitive commercial decisions,
and how you construct a bid for one of these licences with so
many unknowns about what licences are going to be awarded and
when, because the Lottery Commission is saying that they may like
to phase licences, is adding complication upon complication to
a model that works extremely well and their concern, quite correctly,
is that Camelot might apply next time and be unopposed. I do not
see any evidence to support that assumption, one upon which they
have built this extremely complex and under-researched system
for which there is no support from people we know to be potential
bidders for next time.
Mr Jones: You have mentioned confusion
amongst members of the public but also amongst retailers who are
a very important part of the National Lottery model. A number
of concerns have been expressed by retailers as to whether they
have to have additional terminals within their stall, how would
they manage relationships with more than one provider of National
Lottery services, so we have 33,000 retailers within the National
Lottery network, all of whom are thinking very carefully about
this model.
Mr Grade: This is a model that
does not exist anywhere in the world, and internationally people
who are starting lotteries or nations which are reviewing their
own existing state owned lotteries are coming to the United Kingdom
and finding our model extremely attractive, and we are giving
advice to a number of countries who are either thinking of starting
a Lottery or reviewing their own arrangements. The United Kingdom
model works extremely well.
Ms Thompson: There are examples
of multi operators in both Italy and Spain who have been mentioned
in some of the discussion documents. In Italy the two operators
are in the midst of legal proceedings, and the product of the
second operator has not hit the market and it is two years late
or something. In Spain it is totally different because there are
three operators in Spain; one is a regional operator running a
Lottery for Catalan which, as you know, is a very distinct area;
of the other two one is a National Lottery, the equivalent of
ourselves, and the third is an organisation called ONCE which
is run by the blind for the blind so it is very specific, almost
like a charity Lottery as we would have it here, so there is no
model compared to the one being proposed that exists anywhere
in the world. What has been said in one of the documents which
very much concerns me is there has been some talk about perhaps
how it might be split into the on-line games, scratch cards and
interactive. Well, interactive is not a product but a channel
of distribution. We started selling instant win games on the internet
in February last year; we put our daily game and Lotto on in December;
the European game will go on in 2004; we launch on interactive
TV in the spring; and we will bring in mobile phones, with the
regulator's permission, of course, in the autumn of next year,
but they are not games. That is just a channel of distribution.
So if that was a separate licence there would be no way you could
control the cannibalisation.
Q127 Alan Keen: I was an advocate
originally of having just a public-owned Lottery, where that body
would ask for tenders of various things like advertising, design
of the games, with the terminal quite separate. We asked a lot
of questions a couple of years ago about terminals having many
other potential uses. Do you not think that would open up more
innovative thought if the terminal system was put out to tender
to be used for the National Lottery, either for multiple companies
or just for one, but for other uses as well?
Ms Thompson: You are absolutely
right, there are all sorts of uses for the terminals. We have
taken the decision that our priority is to maximise returns for
good causes through the National Lottery and we need it to launch
some new games so that has very much been our focus, but can you
bring innovation into the market place by doing the licensing
in a different way? Yes, I think you can. One of the downsides
of the current licence process is that when you submit a bid,
which in itself is a huge thing—ours was 15,000 pages long
and weighed a quarter of a ton or something and took two years
to write—when you put that bid in you have to commit to
your suppliers for the entire length of the licence, so if you
find yourself in a situation where there are only two major software
suppliers, for example, GTEC who we have and one of their competitors,
then in a sense you are restricting the number of bidders you
could have, and not only that but you are tying us into a supplier
for nearly nine years ahead because you are doing all these deals
two years before the bid goes in, and particularly the area of
technology is changing at a pace. I think a far more sensible
way of approaching this would be to say that we know this model
works—as Michael has said the only Lottery that has been
launched since the United Kingdom National Lottery is South Africa,
who followed the model exactly as here; we have other lotteries
like Turkey who are talking to us because they are a state lottery
wanting to privatise, as is Greece, and if you compare our operating
costs in the United Kingdom of 4.5%, the average in Europe for
lotteries is 14%, and the state run lottery in Belgium operates
on 23%, so the model we have here is proven to work. We are the
most successful Lottery in the world, but I do believe that going
down a route which says, "Okay, we give a Section 5 licence
to an operator and then have an open tendering process for software,
for advertising, the scratch card provision"—whatever
it might be, will give the competition that the government rightly
wants to find but would keep the best of both worlds.
Q128 Mr Flook: Going back to the
Olympics, where did this £750 million figure come from? Is
that what you could raise, or is this what the government needed?
Mr Jones: It came from a programme
that we put together. Clearly there was some sort of idea that
the government wanted to raise about a billion pounds from the
Olympics and they asked us to go away and look at the situation,
and we came back with a proposal based upon a series of games,
some of which you may already have heard of. We have plans for
introducing a pocket change game which has been encapsulated as
a Penny Lotto, we are looking at variants of Lotto scratch cards,
specific event games and TV games, so a whole series of games
making up that £750 machine to be launched over different
timescales, clearly.
Mr Grade: We were very careful
to give a number that was based on obviously careful desktop modelling,
research and a number we believed in.
Q129 Mr Flook: So if you do not reach
the £750 million, the Secretary of State, I am informed,
under a Statutory Instrument can raid the budget to get up to
£750 million. What happens if you are pretty successful and
you go through the £750 in, say, 2010, assuming you win the
right to?
Mr Grade: Assuming that the cost
estimates for running the Olympics are on or within budget, then
that money will go to the other good causes. I believe that is
the government's intention.
Mr Jones: It would be a matter
for the government because clearly it would have been raised under
the hypothecated cause, and if that exceeded the needs of the
Olympics the government would clearly have to make a decision.
Mr Flook: Everyone says Manchester was
very successful in the Commonwealth games, but we conveniently
always skate over the fact that it would appear that the extra
cost was £100 million, or something like that, was it not,
Chairman?
Chairman: Hardly anything!
Q130 Mr Flook: A mere bagatelle but
I think it was something like £100 million on what was projected,
and this is an even bigger project. None of these projects ever
come in on budget apart from LA twenty odd years ago and this
reminds me: how many of the previous Olympics have had some of
their costs contributed by a Lottery? Any?
Ms Thompson: I do not know the
answer. I have a feeling Athens has.
Mr Grade: We will supply you with
the answer. We would rather not guess.
Q131 Mr Flook: Probably very wise!
Just looking at the Olympics again and going through the figures,
what percentage of the £750 million is going to be raised,
do you think, by a new Olympic game that will not cannibalise
existing contributions?
Mr Jones: We said in total, without
splitting it down by the individual games, that half of that £750
million would come from other games, so half of it would be cannibalised.
Ms Thompson: Just to put that
into context, we have the top four of the top ten consumer brands—we
have five but we have the top four. Lotto is number 1, Scratch
Cards number 2, Thunderball is number 3 and Hot Picks is number
4. To achieve the figure we need we would need to launch the equivalent
of a Thunderball, not a Lotto. £750 million sounds a lot
of money but in terms of money for good causes it is about 5%
of what we would normally be raising. It is £50 million on
£1.3 billion each year.
Q132 Mr Flook: But is it the Olympics
that is going to allow you to do that, to attract more players?
Ms Thompson: Absolutely. It is
the pride in Britain factor; the Rugby World Cup phenomenon. That
is what it is about. People really want us to win the bid for
London. They got behind the Commonwealth Games, they will get
behind the Olympics, and I do not know whether I will ever be
able to persuade Mr Keen to play but certainly a lot of non Lottery
players have said they will buy tickets to do their bit to help
support the Games here.
Mr Grade: The other advantage
we have is that whilst the returns from the investment of nearly
£50 million that Camelot shareholders have made in new media,
the on-line internet, 3G and interactive digital television are
very much delayed by the slowness of the take-up of technology,
in the timeframe we are talking about for the Olympics I am sure
that 3G will be up and running very effectively by then and we
will have built our portfolio on the net, and our plans for interactive
digital television. These are whole new distribution mechanisms
for existing games which will reach an awful lot of players who
presently do not play.
Q133 Mr Flook: But are you arguing
against a single operator then, because one of the arguments for
a multi operator is that there could be lots of different games
and there is a much bigger market out there, and you are saying
there is a bigger market out there, and therefore can you tell
me why there is not?
Mr Grade: These are the same games
but with different channels of distribution in the same way that
you can see the same movie in the cinema, on DVD or on television.
Q134 Mr Flook: But the Olympics has
captured people's imagination, and that is creating new players
which could be found by a different operator.
Mr Grade: The novelty here is
this is the first time you have a hypothecated cause—a specific
ticket for a specific cause, and we think the public will find
that transparency extremely attractive.
Q135 Mr Flook: If there were one
for first, second and third division football clubs and Alan could
probably tell me how many people watch that on Saturdays, that
could be a whole new set-up, could it not, and hypothecated by
them playing it themselves individually?
Mr Grade: Parliament has set itself
against hypothecating which is why to effect the Olympic dedicated
games it will require primary legislation, so this is an issue
for Parliament.
Q136 Mr Flook: So the Olympics is
a one-off?
Mr Grade: Very much so, yes, and
we think the public will find it very attractive. Bear in mind
that it will only happen if Britain wins the bid.
Q137 Rosemary McKenna: I have just
a comment, firstly. I do hope that is right but I am not absolutely
certain because I have a feeling that we got behind the World
Rugby and the Manchester Games as the event approached and took
place, not in the run-up to it, as you are hoping. I have that
concern that you can generate an interest in the run-up to it
when it is still a few years off. However, I do hope it works.
Ms Thompson: Thank you.
Q138 Rosemary McKenna: Can I move
on to regulation? You say you believe the National Lottery Commission
is the correct body to regulate the National Lottery only if there
is a single licence holder, not if and when there are multiple
licences awarded. Why?
Mr Grade: For some of the reasons
we outlined earlier in giving this evidence. With the complexity
of running multiple licences and the disputes that will go on
between the licences you just cannot launch a game. You need a
software window, which is a very scarce commodity; there is a
limit to how many new games retailers can learn and sell in any
one year; there is going to be tremendous competing pressure—all
those decisions which have a very sensitive effect on returns
to good causes will land on the desk of the regulator, and they
will be in the position of having to make far-reaching commercial
decisions between different operators. They will be de facto the
operator of the National Lottery, and those are not the skills
for which they have been recruited.
Q139 Rosemary McKenna: So do you
think they have too much of a role already?
Mr Grade: I think the National
Lottery Commission has done a most effective job in ensuring that
the integrity of the Lottery has been well-established and now
is—sort of—taken for granted, not by the National
Lottery Commission but certainly by our players which is very
important, and they have performed a crucial role. Their role
in player protection, in avoiding games that might cause excessive
play and so on has been a very effective role, but the idea that
they will ultimately be the de facto operators of the National
Lottery I think will have a very serious effect on the returns
to good causes. I have read their evidence very carefully, I listened
very carefully this morning, and I do not believe they have a
clue as to what they are getting themselves into with a multiple
licence.
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