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UNCORRECTED TRANSCRIPT OF ORAL EVIDENCE To be published as HC 196-ii House of COMMONS MINUTES OF EVIDENCE TAKEN BEFORE CULTURE, MEDIA AND SPORT COMMITTEE
Tuesday 20 January 2004 MS MOIRA BLACK and MR MARK HARRIS MR MICHAEL GRADE, MS DIANNE THOMPSON and MR TONY JONES Evidence heard in Public Questions 66 - 171
USE OF THE TRANSCRIPT
Oral Evidence Taken before the Culture, Media and Sport Committee on Tuesday 20 January 2004 Members present Mr Gerald Kaufman, in the Chair Michael Fabricant Mr Adrian Flook Charles Hendry Alan Keen Rosemary McKenna Derek Wyatt ________________ Memorandum submitted by The National Lottery Commission Examination of Witnesses Witnesses: Ms Moira Black CBE, Chairman, and Mr Mark Harris, Chief Executive, the National Lottery Commission, examined. Chairman: Thank you very much indeed for attending this meeting. It is very nice to see you again.
Ms Black: I do not think there is probably a huge amount of evidence for that, although I think people have been raising that as a potential issue. If we were to move to multiple licences, I think people have been raising it as a potential issue. No, we have lots of games now. I think we have games that probably tend to attract different types of people, although clearly Camelot can perhaps comment more than I can on that. Ms Black: It is often said that people tend to play less. I think that we should not forget that we have a much higher proportion of our population playing here than other countries, although they tend to play a little bit less in terms of spending more. I am not sure I can really add very much. Probably Camelot are better able to answer. Mr Harris: Certainly the evidence tells us that the Lottery was very successful when it was launched. As for maintaining the high degree of sales, there was considerable enthusiasm and build-up to the Lottery. Over a period of time, it is likely that people, because they do not win, start to question whether or not they should continue to play. The critical thing is to have both a reasonably broad portfolio of games, not one that is so broad that it is confusing and all the games eat into one another but one that meets a range of different players' needs, and then to put real effort into maintaining the games and making sure that they are revitalised from time to time, and that is what we look to the operator to do. Ms Black: There is a lot of evidence that a bit of a jackpot attracts a lot of people. You have to look to the big one in Spain and the other very large ones around the world, which attract huge numbers of people. I do not think, moving on to the last point you made there, we would expect to have more than one operator, if we were given the opportunity to award multiple licences, offering a very big jackpot. That could well be counter-productive. Mr Harris: I think there is evidence that certainly in Lotto games high jackpots are an important part of those games. Equally, there is evidence that increasingly one reads people saying that perhaps there should be games at lower prices. There are such games, games such as Thunderball, and they have a very loyal following and a following that is very consistent and does generate substantial returns for good causes. They are not as big as the jackpot game but they are a separate part, just as scratchcards and other games are separate parts, of the whole portfolio that represents a range of choice for players. Mr Harris: Yes. We believe it is important that those functions are kept in the same regulator and we think that there are real risks if those functions are separated. Ms Black: If I may expand, it is very important to remember that we do not just award a single licence at the beginning after competition; we are continually awarding licences for other games throughout the period of the main licence. We are also continually amending licences based on the regulation that we do as a result of issues that come up, and so they are very integrated. Ms Black: Given our third duty, admittedly our subsidiary duty, which is to maximise the returns to good causes, and that informs everything we do, not just the licensing but the regulation and the amendments to the licences, we do genuinely believe that there would be conflicts of interests if we were within the Gambling Commission, assuming of course that that duty to maximise returns to good causes was retained, because the Gambling Commission will also be licensing other bodies that do not have that requirement. We do not quite see how they can work even-handedly, on the one hand maximising duties to good causes for the Lottery and, on the other hand, with commercial operators not really in a sense caring what they do in that area. We feel that however you try to split out, put Chinese walls around the bit that did the Lottery and the returns to good causes, there is always going to be the perception of bias within that. We do see that as a real problem. Ms Black: I think that is very fair. We do have to remember that the National Lottery is special; it was set up to be special; it was set up to raise funds for good causes; and it can be played pretty anywhere in your local high street, whereas gambling is quite different and it generally can only be played on licensed premises. Once the Gambling Commission has awarded a licence, they do not really care what the operator does on gambling. Obviously the other difference in the Lottery is that at the moment we have a single monopoly, private sector operator, which operates for a fixed term. It is very different from normal gambling. Mr Harris: I think that covers it well. As far as we are concerned, there is a policy that has been set up for the National Lottery, which is that the National Lottery should be put in a special and ring-fenced position to raise returns for good causes. That is why we have a duty to maximise returns. I think that it is quite possible that those policy debates happen at government level. We simply implement the legislation that we are given, whilst seeking to maximise returns to good causes, which is an important part of our functions. Ms Black: I do not know the details of how that was carried out but it certainly has had a few interesting ramifications since. People clearly believe they paid far too much. I am not sure that is necessarily a good bet. Mark Harris has thought much more about auctions than I have as he was involved in the last licence. Mr Harris: We looked at it in the last licence round. We would certainly want to look at it again. I do not want to give the impression that we would be ruling it out. The problem with such an arrangement is that, in order to guarantee returns, an operator would have to be able to guarantee at the outset to put forward a very large sum of money. If you look at the amount that the Lottery raises, £10 billion or £11 billion over a licence period, that order of magnitude, in order for the operator to guarantee that amount of money and guarantee that amount of money in a way that is secure would actually be very costly. Ultimately, that would add to the cost of bidding and could well significantly depress returns to good causes, if indeed they could provide that level of guarantee. If, alternatively, they could not provide that level of guarantee, and we accepted that they should provide a fixed sum paid for out of revenues, you run the real risk that if sales are higher than you expect, the operator could make very substantial windfall gains. If they are lower than you expect and the operator cannot finance the payments that they have committed to under the auction, then the operator will probably withdraw from the licences to exist and there would be a crisis and the money would not actually be raised. Mr Harris: That is not a matter for us. Ms Black: That is for the Government. Ms Black: I will pass that straight to Mark because he was involved at the time of the last competition. Mr Harris: In the last competition we looked very closely not just at what the bidders were offering, and what we asked them to offer was a proportion of sales after prices had been paid, after retail and commission had been paid and after duty had been paid. The object of that was to make sure that they had every incentive to maximise returns to good causes. The more returns to good causes, the better off they were. We looked very carefully at their projections. We looked very carefully at their financial position. We also looked very carefully at projections that we thought that they were likely to achieve. You may remember, because we presented this to you before, that the Commission took the view that actually sales were much more likely to be in the order of around £10 billion, I think it was, a year rather that the £15 billion that the figures were predicting. We looked at their financial structure on those sales forecasts and also on lower sales forecasts. We wanted to be sure that they were capable of financing themselves in lower sales situations. To sum it up, we looked very carefully at it. We did not just say, "That is what they forecast. That is great". Mr Harris: We do not take the view that the forecasts that we used last time are unobtainable. We believe that sales can be stabilised. Certainly, if you look at sales across the whole portfolio - and it is important not just to focus in on an individual game - they can be stabilised and they can be grown. Part of the growth comes from the expansion in the portfolio; part of it comes from keeping the product alive in people's minds, selling the benefits of it, improving it where it is possible to improve it. That is very much what we are looking to the operator to do. Ms Black: If we are given the flexibly to do so, we certainly see a number of operators potentially. Ms Black: We would welcome flexibility. Perhaps I could explain why. We do not see more necessarily than two or three different operators. I think if there were any more than that you would potentially be running into the problems of operators competing with each other. Do I put my Lottery money here or do I put it there? That is not what we want. We want them to say, "I will put my Lottery money there and there". There is certainly evidence that some gains are relatively independent of each other. People are likely perhaps to play one or the other type of game. We would very much welcome that flexibility because we see, as indeed you yourself have said in a previous report, that we run a serious risk if we do not have the flexibility that we continue with a single monopoly operator. One of the arguments against that is: the advantage of the incumbency just does not exist and there will be lots of people coming forward to bid. I sincerely hope they will. If we find they do not, and if we find that the incumbency advantage is huge, then by the time we get to that stage, it is going to be too late to do anything about it. If, having been given the flexibility, we find that we get to that stage and one company comes up with a bid that for everything that we are looking to license is the best, then we would expect to award the licences to that one company. Without flexibility, we think we may have trouble being able to maximise the returns. Ms Black: A lot of the detail we simply cannot answer at the moment. We will expect to be able to answer the detail of that as and when we are able to do the research and consult and everything else, which is clearly a fundamental part of it. We clearly cannot do that until the structure of the Bill is at least a lot clearer by Second Reading, which is now. Having said that, we would not expect to enfranchise, in your terms, two people who were going to run competing games because that clearly is not going to be very sensible. There is certainly some evidence that, for example, the main on-line draw is a market that is relatively independent from scratchcards. We might envisage the main jackpot gain being, one, licences, and perhaps scratchcards another. That is possible. We do not know and we have not got that far. In terms of infrastructure and other issues, that is clearly an issue. We would not expect to see in your local newsagent, and I am thinking of mine in particular, the terminals for the main on-line going at one end of the counter and anywhere there is room for the others because there is not any room. Clearly, there would have to be some commonality. Certainly, when thinking about technological developments, that is gong to be very important. If you look at banking and TMs, they can service a number of banks at the moment so why should not a single terminal be able to service a number of different operators? That again is further down the road. We are five years off the start of the next licence or licences. Technology will have jumped this change hugely by then but it is already moving in the direction where people can work much more together within a single piece of hardware. Clearly, our regulation, the giving of the licences, is going to be focused on trying to avoid that counter-productive competition and getting people to work together, which may be a challenge. Mr Harris: We look at it directly, monthly, in terms of their sales, the various gains. In terms of return on capital, that issue must have been addressed at the time of the licence because they effectively take a fixed element of the sales. Mr Harris: Effectively, the way the licence is structured is that we rely on the competition that took place for the licence to demonstrate that the good causes are getting the best possible proportion of the overall pot, if you like. What we have not done is put specific measures in place whereby if the operator is making a better return on capital than a set amount, we claw back funds in that way. Mr Harris: We do not monitor that position specifically. Mr Harris: I do not have that figure to hand. I could certainly look at their accounts and provide it, or maybe Camelot can provide you with that figure themselves. Mr Harris: We do not do that during the licence period, no, because, as I say, we rely on the structure of the licence to demonstrate that Camelot is providing the best possible return to good causes. That is our key interest. Ms Black: It effectively was fixed when we awarded the licence. Ms Black: It is subsidiary to propriety and player protection but, subject to those two, then it is our responsibility. Ms Black: If we had the flexibility to ask people to tender for several different licences, we would expect that that in itself would bring out a lot of innovation that might not be available from the organisation. That is where we would expect to see the benefits derived, because of the innovation from different people doing different things. Mr Harris: It is important to say this. I have described the model we have at the moment, which relies on there being as strong a competition as possible for the licence. Our concern, which is a concern that has been echoed by others who have looked at it, is that there is a real risk that there would not be a strong competition for the next licence. If that were the case, if Camelot were, for example, the only organisation to come forward and bid, then you would have no easy guarantee that you were doing the best you could for good causes. That might well take you into a completely different model of regulation, a model of regulation much more akin to that used for the utilities when utilities were monopolies, of looking at return on capital, looking at return on investment, defining what those are and saying, "This is the return we are prepared to pay you for running the Lottery". Our understanding is that those models are quite difficult to operate and they require quite intrusive regulation in terms of collecting information, verifying that information, making sure that it is correct, reviewing mechanisms and reviewing returns that are due. Therefore, that is not the model that we favour following, if we can avoid doing so. Our concern, as I say, is not to create competition between licensees during the licence period so much as to make sure that we get as strong a competition as possible for the licence or licences to operate the Lottery. Mr Harris: It is certainly something that we will look at and try to understand, because that will be one indication of the likelihood of there being competition. If there is a very high rate of return, obviously that would be attractive. It is difficult to define what rate of return someone coming into the Lottery would expect because it is reasonably unique. Ms Black: In the normal course of events, some time next year we would start to be consulting on the form of the licence. Obviously, the timing of any legislation may affect that. We would not quite start to be looking at it yet. We are only two years into the existing licence. Some time next year we would really be starting to be gearing up to look forward. Until then, we have not done so. Mr Harris: Firstly, it is important to us that we time the work we do appropriately and that that is actually telling us about what the situation is as we near competition, rather than further away from it. Secondly, we only have limited powers as to what we can properly spend public money on, and spending money developing detailed proposals, and I know you are not saying detailed proposals --- Mr Harris: I accept that absolutely. The point is that working up these proposals in more detail, which clearly needs to be done, is not something we have the power to do. Ms Black: It is not yet time to do so. We would not, in any event, be expecting to do very much, or anything frankly, until next year. Ms Black: Potentially they might. I am hoping, in terms of size, that they may well be somewhat smaller perhaps because a smaller company might feel it could happily take on a segment but could not possibly contemplate the whole lot. They might possibly be involved with gambling. We would then have to think whether we would require them to set up a single purpose company for the Lottery, as we have done in the past with Camelot. What sort of other companies, I have no idea. We will want to get to as many types of companies as we can to say: "What about it? This is what it is all about. These are the issues. Let us talk." Ms Black: And the Treasury, of course! Ms Black: How did we do it originally? Mr Harris: The Lottery so far has been structured in that we want a separate company to run the Lottery so that that company actually has a focus on doing the best for the Lottery and is not distracted by other things that it might wish to do or having other reputational risks like the ones you talk about the Lottery being directly associated with. However, I should point out that we have never said that gambling companies cannot be involved. Indeed, at different times, gambling companies have expressed an interest, clearly through shareholding of a separate purpose company. They would have the opportunity to do it. To date, we have taken the view that it is very important that the focus of the operator is on maximising returns to good causes and on the Lottery and that they are not making trade-offs by saying, "Actually we could earn more doing this and so we will move out of the Lottery and we will focus all our management effort elsewhere". Ms Black: I do not think we have any firm views on that at the moment. Ms Black: I think we would be very interested to look at their governance arrangements. Ms Black: You mean a separate company perhaps? Ms Black: We would clearly want to look at their governance arrangements. I have not really thought about it. Mr Harris: Camelot has looked at other opportunities in the past. Through her sister companies, it has an interest in a South African lottery, for example. We do not seek to regulate or control that. What we do seek to do is to make sure that the main focus of the entity that is Camelot, as opposed to the sister company, is focused on the Lottery. We do have powers within the licence that enable us to approve effectively if Camelot wishes to divert a substantial part of its management resource into some other enterprise. That is not to say that Camelot's shareholders cannot set up a separate company to do something else and build on expertise by transferring staff. That is what has happened in the past. What we would not want is an operator who decided that actually, from the expertise they had built from the Lottery and still having a licence running, they would rather diversify into other things and let the Lottery side of things run down. We would be nervous of that. Ms Black: It might be good corporate governance in any event. Mr Harris: We asked to see in the last competition the corporate governance arrangements but again, the external directors' principal responsibilities are to the shareholders of the company. That is part of the reason why we believe that the duty to maximise returns has to stay with the regulator, because there may well be situations where the directors, be they independent with the responsibility to the shareholders of the company, will do things that are in the shareholders' interests but are not necessarily in the National Lottery's interests. Ms Black: We were asked to review some figures that Camelot produced, which we did, and we gave our view to the Government on those. Ms Black: We concluded that we felt that Camelot's figures were reasonable, bearing in mind the lack of research but also bearing in mind past experience on new launches. We felt that the figure that they put forward as being the money that would be taken way from other good causes was a fair basis to work on. Ms Black: I cannot remember. Mr Harris: We did two pieces of work. One was a preliminary piece of work, which was carried out - and I am sorry but I simply cannot remember the exact timing - I think in the late spring. That piece of work was carried out relatively quickly over a period of a few weeks. Then there was a subsequent piece of work, which is the work quoted, which was carried out by Camelot over the summer. We reviewed it as it was being carried out. That work was completed late summer/early autumn. That was carried out over a period of about three months. Mr Harris: If the London bid is successful, then the IOC rules say it is 2005. Mr Harris: Yes. Ms Black: I agree with you entirely. I pass that to Mark because he is involved with the National Lottery Promotions Unit. Mr Harris: I cannot speak for the unit, but I am involved in some of the work it does. At the moment, I believe it is doing a range of detailed research to underpin and really work out what is meant by people feeling that they would like to know more about what happens in the community and what actually do people want to know; what aspirations they have; what views they have about the Lottery; and how might those views be addressed. They are doing a range of research to work out what it is that people want and how people can be helped to make that association most effectively. An early initiative is the "Blue Plaque Scheme", which Camelot has supported, and that is now being rolled out for past grants. My understanding is that it will become a norm for future grants. It cannot be imposed on past grants but there are many people that have received grants who are very happy to have a blue plaque. That is one part of it. The other part, which goes much more into the distribution areas and for which we are not responsible and I am less knowledgeable about, is working out how the distributors present themselves and how they work together to get over messages about the Lottery and to make the points that you were making about, such as raising awareness in communities of what the Lottery is really supporting. Mr Harris: Certainly part of the task of the National Lottery Promotion Unit is to work out how that best can be done and to work with distributors so that the distributors achieve higher standards on that. I know that is a much generalised answer. I am afraid I cannot give you the detail, although I believe you are seeing distributors later on. They will be able to tell you much more about it and much more about how they are working together through their own common groups as well to co-ordinate and present that. Ms Black: Not necessarily I think is the answer to that. I am not sure how much research has been done into it. Ms Black: We accept that. I am not sure that all the research necessarily supports that, but accepting that --- Ms Black: Yes, the Lottery has been running ten years. We have only actually been running five, but, yes. Mr Harris: The problem we have is that all of that demonstrating where good cause money has gone is a function of the good causes themselves, the distributors, who need to be persuaded how best to promote the Lottery. Clearly, we have taken the view that there is a link between the use of Lottery money for good causes on the one hand and games on the other, in the sense certainly that if there is a lot of bad publicity around the Lottery, that affects people's views of the games as well and can provide them with an excuse to leave. Mr Harris: No, I am sorry. What I am saying is that there is a clear, logical argument that that is the case. What is much more difficult is to tease out detailed figures, and I have seen a variety of detailed figures quoted in the press about "this grant has had this effect". The variation that one gets on Lottery sales just naturally and then seeing whether one particular event has had a particular impact is very difficult to demonstrate in absolute terms. It is very difficult to say that it was definitely that event that had that effect and the effect was of this size. What we are saying is that we accept the argument that certainly the better Lottery good causes money is promoted, the more positive people feel about that and the more positive they are likely to feel about gains. It does not mean they will play because people play essentially for their own motives, which are to win prizes, and particularly to win jackpot prizes in the big prize games. That is why they play. They are likely to play longer if they have a feeling that the good causes money is being used in a positive way. We very much support the work that is now being done by the Promotions Unit but it is not within our area of responsibility to make that take place. We do not have any power to say to anyone, "There shall be blue plaques". Mr Harris: I cannot comment because I do not have the responsibility and it is not an area that the National Lottery Commission has been directly involved in, but we are very pleased that the unit is now set up. We think that real benefits should flow from it. Chairman: Thank you very much.
Memorandum submitted by Camelot Group plc Examination of Witnesses Witnesses: Mr Michael Grade CBE, Chairman, Ms Dianne Thompson, Chief Executive, and Mr Tony Jones, Operations Director, Camelot Group plc, examined. 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. 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 per cent in its second licence bid. So there was in fact an auction downwards in terms of retained profit. 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 that 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. We launched and 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 £40 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. 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 per cent 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. 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. 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 is a lot less than 1 times 75. 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. 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 gains. Our ideal plan would have been to launch that in time for Athens this year but the IOC has ruled that we cannot do any Lottery gains 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 per cent ---- Chairman: Could I interrupt and say that I would remove those "maybes". 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 --- 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. Ms Thompson: It is of that order. Mr Jones: It represents about 5 per cent of the total amounts that go to good causes. In any one year, about £1.3 billion goes to good causes. 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. 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. Mr Grade: I do not think it does, if I may. 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. 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. 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. 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 later 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 to distribution. So if that was a separate licence there would be no way you could control the cannibalisation. 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 per cent, the average in Europe for lotteries is 14 per cent, and the state run lottery in Belgium operates on 23 per cent, so the model we have here is proving 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. 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. 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! 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. 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 per cent of what we would normally be raising. It is £50 million on £1.3 billion each year. 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. 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. 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. 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. 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. Ms Thompson: Thank you. 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. 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. Mr Grade: For a multiple licence? Mr Grade: I just hope that this idea can be headed off and that Parliament will not allow the regulator this amount of discretion in making this decision. It is far too important. We do not believe - and we are not alone, I have not heard anybody yet support them in this idea - that this is an idea which, if you care about returns to good causes and the public good of the Lottery, will fly, and it will not attract more bidders. The whole proposal is based on an assumption which you can read - and I am sure you have read - in their document that this will create more bidders. Well, two bidders who have expressed an interest in the Lottery are the People's Lottery and Lord Mancroft who is in this business who have both said that this is the least attractive option, and less attractive than a single licence. I am not quite sure why the NLC is pushing this idea. Mr Jones: Unfortunately they would not be able to do so under the current legislation. Mr Jones: Because of the very tight controls we have. In order to play our games you have to go through a very detailed registration process. You have to be age-verified, you have to have appropriate bank accounts in the United Kingdom and residences, so we do make it so that people from abroad cannot play our game -- Mr Jones: -- and quite rightly so because, clearly, under the terms of our licence we are only operating a United Kingdom National Lottery. Ms Thompson: It would be absolutely opening the floodgates which protect under European law. There is case law called Schindler which protects national boundaries so, under European law as well as British law, we cannot sell outside the United Kingdom and equally nobody can come in and sell their tickets here. We might gain if we were allowed to sell Olympic tickets, although I am not sure we would necessarily - I am not sure the French would want to play our games if we win and Paris does not! - but, that apart, El Gordo, for instance, the huge Lottery in Spain, would have a huge cannibalistic effect potentially on United Kingdom National Lottery games, so I think it is in all our best interests that the national boundaries stay. Chairman: Thank you very much indeed; we are very grateful. Before we move on, may I welcome the presence in this room of a former member of this Committee, John Maxton, and could I say that I hope his presence at Westminster is neither accidental or temporary! Thank you very much. Memorandum submitted by The People's Lottery Examination of Witness Witness: Mr Simon Burridge, former Chief Executive, The People's Lottery, examined. Mr Burridge: Under the current system, yes. Mr Burridge: I do not think it is going down a cul-de-sac trying to change the rules; I think it is going down a cul-de-sac trying to change the rules in the way it proposes. Faced between the choice of Camelot in perpetuity and the government's new proposals, with the greatest reluctance I think I would volunteer for Camelot in perpetuity as the lesser of two evils. I think there does need to be a change because, from all the evidence we have, and I know Michael Grade said the opposite, we have found no-one who shows even the slightest interest in bidding for the next licence round. Mr Burridge: They are much higher than has generally been given credence. The cost to the People's Lottery of putting together the bid last time round was over £15 million, and you will remember that the purpose of our bid was that all the profit should go to good causes and, even with the financial advantage that that should in theory have given us, we were unsuccessful and it is a huge amount of work. I do not want to dwell particularly on the last bid but there is very much a feeling that the best bid did not necessarily win and, if you are going to invest those sorts of sums of money and that amount of investment in such a contest, to believe that makes it not worth the effort. Mr Burridge: Yes. Mr Burridge: Not a lot, is the short answer. It exists only insofar as I personify it with reference to Sir Richard Branson and John Jackson. It is capable of putting together another bid but, in between the various bid processes, it lies dormant. Mr Burridge: We are not interested in pursuing bids anywhere else. It existed purely for the United Kingdom. Mr Burridge: I agree that that should be a condition, not only because it generates additional revenue without any additional demands on the player base because it is required to spend money on it, if you like, but, secondly, as the numbers have fallen and the numbers of retail outlets has expanded and the number of distribution channels has expanded, there is inevitably less pressure at the retailers in terms of queuing. Originally the concern was that using it for too many other purposes would get in the way of the purpose for which those terminals originally existed, but there is quite a lot of evidence to the effect that that is no longer such a constricting factor. Mr Burridge: Because of the registration process. At the point of register there are a number of checks that are made on you which happen fairly instantaneously but which are matched against the electoral role; there are age and residency verifications; there is a matching of your address; so it is within a very short period of time on-line possible to determine exactly where someone is, if they are who they say they are, and what age they are. Mr Burridge: It would be held by the Lottery operator but the information would have been given by the individuals. For example, on the various gambling sites there are a number of offshore casinos operating out of Alderney, Isle of Man - whatever - and they have to go through exactly the same process in order to ensure that the residents are exactly who they are, where they are and what they say they are. Mr Burridge: Of the Lottery? Mr Burridge: It is technically possible, yes. Mr Burridge: Not under the current proposals. There are two issues, and forgive me if I am going back too far, which I think are important: one is the nature of the Lottery as a product, which is essentially its games and marketing because that is all that exists - it has no physical attributes in any other way, and, secondly, the nature of competition. Competition is a means not an end, and the idea of having lots of different people competing for lots of different games does not necessarily make them better games, more profitable games or more popular games. For example, if you are a confectionery manufacturer you do not launch new brands to compete with yourself but to extend the range of the market and your appeal to different categories of consumer, and it is very important that that is controlled centrally otherwise you get a complete bunfight. Under the current proposals it would be that the National Lottery Commission is effectively the de facto runner of the National Lottery. They neither have the skills for it and, secondly, it would conflict considerably with their role as an independent regulator of the processes that then take place. It also raises many more problems than I can sensibly think of an answer for in terms of who owns what and what is the interaction of people from games, from retailers, from terminals, from equipment, from new developments, from under-age assessments and so forth, and I think it is just a recipe for disaster. It would provide more competition, but would it provide a greater return for good causes? I think the answer categorically is "No". Mr Burridge: In a sense it is a question of what are the advantages of a separate company running it. If a separate company has a better game and a better retail structure then you could say "Yes", but then they are not effectively running it because they are using it through Camelot's infrastructure. One of the issues about the Lottery since it started is that every week we have a debate on how to spend the money and only every seven years do we have a debate on how to raise it and, self-evidently, what Camelot, or any operator, needs to do is come up with better games which capture more the public's imagination. If someone can do that for the Olympic Games then that is fine under the Section 6 licence, and could go ahead under the current constitution. Mr Burridge: I have not intended to be an advocate for the status quo because I do not think the status quo is right. I looked at the status quo versus the proposed alternative. Michael Grade was saying that South Africa had gone to Camelot's advantage but actually it was an unfortunate choice because, if you look into it, a decision was made to give it to someone else and then there were happenings behind the scenes and the decision was reversed outside the South African Parliament, so it was not necessarily a triumph of logic. Almost all lotteries in the world should be run with all profits going to good causes, and I think there should be a National Lottery Commissioner as distinct from the National Lottery Commission who would be the chief executive, effectively, appointing the various people to run it, and that everyone including the operator is chosen on a regular basis. I do not know if you remember that, before the last licence award, there was a glitch with some of the software which meant that a number of players were not being paid their full amount, and elements within Camelot decided to cover that up. One of the problems with the current system is that the National Lottery Commission has effectively no power to deal with that; they can either say "You are fit" or "You are not fit", and if they say that you are not fit then the whole Lottery closes down and good causes will be the primary loser. Mr Burridge: Not a commissioner in the sense that he is a regulator. Effectively the State should appoint people to run the National Lottery who are replaceable, accountable, where the State should own the various infrastructure and pay the costs, and then you would have a system where people could apply to be operators, apply to be advertising, security printers or whatever, and that would be changeable and you would get competition on that basis because people would be competing on the basis of their specialist skills. Mr Burridge: I do. Chairman: I cannot ask for a better answer! Mr Burridge: There are two reasons. One is they realise there are unlikely to be any competitive bids next time round unless something changes -- Mr Burridge: That Camelot would effectively have the licence in perpetuity, which is a "bad thing" and therefore one needs to inject competition. I am not sure that they have, in the way that this has been drafted, a realistic sense of what competition within this market place is. Competition is very effective at providing people with alternatives with which they can compete and drive the price down or whatever. If anything, with the National Lottery, there is a vested interest in driving the price up because the amount per play will gradually be eroded over time. It is an issue all lotteries face rather than a plea for huge increases in prices, but what competition should do is provide better services, better marketing, better games, better infrastructure, better retailer training and so on, but those are not best achieved by just creating more competition to run the various bits. You could argue that if we had a general election every six months that would provide an increase in competition but not necessarily an increase in the effectiveness of government, and that seems to be the model that these proposals are heading towards in that we are creating competition but not anything more effective as an operating mechanism. Mr Burridge: Yes. Mr Burridge: Yes, but what you are not doing is comparing eggs with eggs. Most of the Lottery jurisdictions around pretty much everywhere in the world are much smaller than in the United Kingdom and over a much greater land mass, so if we were not the best we would be doing worse than we are. We are a natural Lottery jurisdiction with over 55 million adults in a relatively short space of time and a small geographical area with a predilection for gaming that previously existed, so it was always going to be the ideal Lottery jurisdiction. Richard Branson's phone call to the United Kingdom lottery consortium that was the first bid correctly identified through all the modelling we did that it was going to be much more and Oflot, as I think they were then, said we were overambitious, but we were much nearer the results that Camelot came up with, so it is wrong to assume that comparative efficiency versus, say, Belgium and maximising returns for good causes in the United Kingdom is necessarily the same. Mr Burridge: Not particularly. Mr Burridge: In my view, there are two aspects to that: firstly, what leads to the efficiency claim is that it is a monopoly and, therefore, if you want to go in for this sort of thing you have to do it via the National Lottery, and added to that is the size of prizes, and therefore the critical mass that you can create is a fantastically important motivator, and you can see that with the jackpots; but, secondly, the danger of it is that it is not sufficiently compelling to Camelot to examine themselves through anything other than rose-tinted glasses. In my view, and this is a personal view, they have not marketed well, their games have been overcomplicated and not particularly well thought through, they have managed to lose the winnability and the fun elements out of Lottery which are compelling, and the reason they have allowed that to happen is they have not internally established the size of the problem they are facing, and part of their cosiness would be down to the fact that there is a degree of protection within which they operate. Mr Burridge: Absolutely. Nevertheless I think, even allowing for that, they still could have done better and therefore made themselves more money. Mr Burridge: Thank you very much. |