PGRI Introduction: The role of the Internet as a distributional e-commerce channel for traditional lottery games is vital. In fact, it’s not just about reaching the “younger demographic”, since the Internet is now a part of everyone’s life. However, there is another, perhaps even more important, component to this picture. Presently, there is a massive population of lottery customers who buy the product in land-based retail stores. That won’t change. What needs to change, though, is the nature of the relationship between lottery customer and lottery operator. The future of Lottery depends on converting that anonymous retail consumer base into a connected and interactive customer base. The Internet is the key to making that happen – to building a foundation based on dynamic communication and interaction.
That’s the mission of Neogames. Having pioneered the online scratch cards market, NeoGames focuses on the soft-gaming segment through its extensive portfolio of revenue-generating games for the web and mobile environments. NeoGames provides a complete and field-proven soft-gaming solution, consisting of the world’s largest instant win and lottery games portfolio. Laid over a flexible and robust management platform and complemented with a complete suite of managed services that facilitates lottery growth. With over 200 million games sold worldwide every month through its partner networks of government lotteries and regulated gaming operators, NeoGames understands the needs of the government-gaming operator and is dedicated to supporting the growth of its customers in this sector.
Paul Jason, Public Gaming: How is the Internet changing the mass-market approach that has driven the growth of consumer products, like lottery, for decades?
Ilan Rosen: The Internet has caused a major shift from mass-marketing to completely new ways of tailoring products to appeal to increasingly tighter, smaller consumer segment. That may not sound like a positive thing – why do we want to appeal to smaller groups? The reason is that it is much more profitable.
The cost of designing, then creating, then marketing, and then distributing the product in the mass-market world entails a high break-even. Those high up-front costs result in a very high minimum threshold of sales to cover those costs. This has two problematic impacts. First, there is no room in the portfolio for products that may have strong consumer appeal but fail to meet that minimum threshold. Second, the high cost of a mistake makes it difficult to try new product concepts, and so therefore inhibits innovation. The industry is very dependent on its blockbuster products to generate the income. The cost of developing, launching, and promoting new products for the Internet channel is much lower than for the retail channel and the products can be offered for a longer time. That brings down both the cost of trying new products and also the sales-threshold at which a product breaks even. The irony is that the Internet enables the operator to gather so much more data to guide the product development process and promotion strategies – so the ability to target the consumer with products that appeal to their specific preferences is much greater with the Internet customer.
Perhaps because of the physicality of the retail experience, retail lottery operations and their platforms tend to focus on the product. There is no physical environment for the operator to focus on in the Internet world, apart from a computer monitor or hand-held device. This results in the focus of Internet platforms being more squarely on the lottery players. This major shift in mindset produces a different approach towards everything … game development, Customer Service and Relationship Management, promotional strategy. Etc.
This points us to data-analytics.
I. Rosen: Exactly. Data-analytics is truly the key component to any effective e-commerce strategy. The Internet customer has registered with the operator, so the basic demographic information is captured with every transaction. You’re no longer surveying small samples of consumers who may or may not give accurate information about their buying motives, and then extrapolating from that survey to generalize the behavior of the entire population of players. On the Internet, you have the facts of which customers are buying which products. That information is captured in real-time with every transaction. And you can isolate product attributes to determine which are most appealing and continually fine-tune the product for maximum appeal.
For instance, one our newest clients was achieving some measure of success with i-lottery products that targeted younger male audiences. They did not deliberately exclude other segments. It’s just the products they were offering at the time tended to skew towards those play-styles that people associate with consumer groups with high game-playing Internet activity. But that’s a misguided approach. It might seem to be a logical strategy to go for the “low-hanging-fruit” but there are three big problems with it. First, the play-style of the young male demographic identified as the most dedicated i-gamer is not Lottery’s sweet-spot. It is a highly competitive space and the young male is typically looking more for high-velocity games that deliver gaming thrill than for the “hope-and-dream” soft-games that appeal to lottery players. Second, it neglects the core player, many of whom do want the option of playing online and whose loyalty and repeat business is reinforced by enabling an Internet-based relationship. And third, it foregoes one of the major cornerstones of an effective Internet strategy which is to create an interactive relationship with the core player; with all players for that matter. We have found that it’s actually the core player demographic, the consumer who is used to buying at retail and will continue to buy at retail, who contributes the highest revenues in proportion to its population.
Obviously the internet is used as an effective tool to also reach an audience which may not be buying at retail, to introduce new consumer groups to Lottery, and it succeeds in that. This new relationship is built over time, and in the future will grow to be a new significant income source however they should not be the only target of iLottery marketing. So, back to that operator who had been focusing on the young, male demographic and wanted us to refresh their i-lottery strategy: We created a product mix that appealed to a number of new segments, identifying a cross-section of 25 different play-styles and preferences. Additionally, we prepared 15 games for the pipeline, just waiting to refresh the experience of players in each segment every few weeks. And our data-analytics team guided us on how to modify the games based on the feedback we get on a real-time basis. This almost doubled the revenues within 2 months and allowed the lottery to increase the active audiences in these new segments. We then constantly continue to add new identified segments and prepare a marketing approach with targeted games and incentive offering for them.
By the way, we think of the future of market segmentation as being based on psychographics instead of demographics. In our NeoSphere platform we work by automatic and dynamic creation of dozens of segments, based on a wide matrix of parameters such as frequency of play, game preferences, age, gender, depositing behavior, times and days in the week of player activity, impulse to buy factor, and more. These make up the psychographic profile.
We still want to create products that appeal to a market segmented by play-styles. But we are no longer constrained by preconceived notions based on those traditional attributes of age/gender/socio-economic segments. For instance, we recently showed our game portfolio to a large US lottery and presented one of the games which we created for a “young male” audience based on a spooky Dungeon &Dragons theme called Forces of Terra, and when we showed it in a meeting with a US lottery, one of the female 30+ in the marketing team said “I’ll play this game, I love it, I used to be a D&D fan when I was young”. So if we didn’t have a dynamic analytic tool in the NeoSphere to recognize that she would actually play it, how often she would play it, when and how much, we wouldn’t place her in a segment that would receive marketing offers relevant for her taste. Second example, obviously mobile games would intuitively be identified as a younger audience games, and indeed they are. However, if you miss out on marketing to the 55+ group that are active mobile players you would miss 7% of the market which that is a great revenue opportunity. By the way, psychographics is not only measured in in-play behavior but also by the way they like to be rewarded. For example, men tend to prefer cash-back or product rewards; women tend to prefer to be rewarded with tangible and lifestyle products.
How does the information gleaned in the online gaming world improve off-line retail product development and strategy?
I. Rosen: Products can and should be designed to take full advantage of the uniqueness of each medium and channel of distribution. Still, the fact remains that the fundamental game attributes that appeal to the consumer are similar across all media and channels. Our portfolio is divided between online scratch cards and instant win games, and we are often asked “what’s the difference?” An example of how our online approach is nuanced to take full advantage of the medium but also relate to the play-styles with traditional consumer appeal: online scratch cards are a fun and entertaining version of games which are close in look and play behavior to the printed games sold in retail stores. Conversely, our interactive instant win games carry the same mathematical psychology, as well as other mandatory regulatory attributes, but the play mechanics include a much wider interpretation of casual games. Some lotteries are bound to take the first, other are more keen on the latter. Our approach is that both are needed because they serve different audiences. For example, in Mexico the lottery has decided to discontinue a TV show with a famous local Bingo game. We were then asked to develop an interactive instant version of this popular game that would be available in the web. But it’s interesting to see how many requests we have from lotteries to see if we could make printed versions of our interactive games. They see the online games and want to recreate printed version for their retail stores. We thought most of the requests would be vice versa, to recreate the printed games for the online channel. .
Instead of transplanting off-line games to the Internet, your approach does the opposite. You use the Internet to inform and enhance the off-line business.
I. Rosen: Neogames is typically approached initially because of our portfolio of game content. Then our clients realize that what we really offer is the experience and knowledge to help them develop a much more expansive strategy to enhance game development and promotional strategy. The content we have on the shelf forms the basis for developing products and strategies that are custom-made for each individual market. The case-studies inform our approach to promotional strategy. It is these assets combined with our expertise in data-analytics derived from our NeoSphere management platform that enables us to appeal to the unique needs of each market-place. I would have to say that it is data-analytics that forms the heart of our approach to serving the lotteries with a dynamic system for delivering the right products to the right targets with the most effective promotions.
How difficult is it to measure the impact of Players Clubs and Loyalty Programs?
I. Rosen: Not only is it not difficult to measure the overall impact, you can and should get precise data on exactly which attributes of your programs are having the optimal effect and which are not as relevant. It’s like the old adage that “50% of my advertising doesn’t work; I just don’t know which 50% it is”. We now have the tools to not accept that kind of sloppy thinking. That’s the off-line world. In our online Player Club program, Players collect points automatically and can transparently see their progress between the heir levels of play and the points collected. We then offer them ways to redeem their points, or use their points to collect double and triple points. The rewards are tailored to appeal to the specific player profile. We then analyze the results to always be in the process of customizing and fine-tuning the games, target segments, promotional strategies, and reward structure to be most relevant and effective for each player segment. Most players would benefit more from a lottery product reward as opposed to pure tangible gifts. Obviously, the lottery itself would benefit from such a tighter connection to sales. That’s also why lotteries should want to create a customer base that migrates back and forth between off-line retail stores and online. The online relationship is what will inform every aspect of product development and promotion. It also creates the opportunity for the operator to communicate directly with the player. New product ideas and promotions can be delivered online that drive off-line retail sales. It is often said that we need to go online because that’s where the consumer is. The reality is we need to migrate the consumer to online because that’s where the operator can create the connected relationship that will drive success in the off-line world as well as the online world.
How do you see the U.S. market evolving in the interactive space?
I. Rosen: We see a trend towards best-of-breed to deliver superior performance. Clearly, innovative content is key for success and it is going to come from multiple suppliers. There really is no technological obstacle to enabling a dynamic flow of content coming from a number of sources. Obviously the lottery needs to maintain the highest standards of quality assurance and security. Many vendors are not able to meet those high standards and that fact reduces the number providers down to only the best and most experienced and qualified. The same has happened in the Casino land-based market and it happens in online as well. We might call it the multi-sourcing model, enabling a larger number of commercial partners to help lotteries innovate, evolve, and deliver the maximum value to the consumer. The goal is to produce the best operating performance to maximize profits for Good Causes. And it is vital that lotteries clear a path for that to happen. Nothing stifles progress more than the inability to exercise freedom of choice. The private iGaming industry in Europe has already reached a maturity of technology integration that has become a de-facto standard way of working between experienced game providers and a central management system. This model has been adopted by lotteries in Europe as well and will probably make its way into the US market as well. In fact, the Canadian lotteries are adopting a similar strategy as they prepare to introduce their second phase of online offerings. But the movement towards multiple suppliers does need to be driven by the operator.
Your NeoSphere is a platform that facilitates the integration and inter-operability of multiple game content platforms?
I. Rosen: Exactly. Among other important modules for Player Management, Customer Care, Marketing, Payments and more, our NeoSphere includes a Game-Server module that has a dual-end integration ability. On one hand it connects with existing iGaming or iLottery PAM (Player Account Management) systems and on the other hand can connect 3rd party game libraries to it. It may sound complicated, but in the iGaming industry it is really an almost de-facto standard that was created in recent years to facilitate the basic desire of iGmaing operators to add significant content providers into their offering. This module has been implemented in lottery operations all around the world and works well.
As a supplier to i-gaming operators, NeoGames decided to focuses on lottery and government-sponsored operators. Why was that?
I. Rosen: We do have good relationships also with our regulated private gaming operators in Europe. The thing is, our focus has always been on the soft-gaming products that appeal to the lottery player. We have found that the core customer base of commercial i-gaming operators is the hard-core gamers playing Casino and Poker games and not the soft-gaming products like Lottery Instants. We have also found that the hard-core gamers do not tend to convert over and play the soft games. Instants are becoming a side-dish to their main meal. The hard-core gaming market is focused on making high revenues from a relatively very small number of VIP players. It was only natural for us to see that, given our corporate DNA, our success lies with Lottery and so therefore our focus should be on cooperation with lotteries . Instead of small target group of high-profit VIP players, Lottery focuses on a mass audience brand with customers seeking lower risk entertainment products and marketing approach that is consistent with that as well. For Lottery, our products are clearly the main dish on the menu and that’s why our innovation flourishes in the Lottery space.
Our most recent addition to complete this offering is our new Bingo platform. Bingo is a soft-game that migrates lottery into the realm of longer-play, higher-entertainment consumer experience. We believe that US lotteries will in time be able to launch Bingo solutions to their markets and that it will become an integral part of their offering
The percentage of gaming done on mobile is increasing faster than any other channel. Won’t Mobile drive a further re-invention of the games themselves?
I. Rosen: The mobile business is the fastest growing channel for our customers and we are highly invested in the goal of helping lotteries take full advantage of that space. We started very early with Mobile, 2009. For a long while, revenue growth in the Mobile space as very slow. Only once the smartphone market reached a mass penetration, a tipping point occurred and we now see a striking hockey-stick jump in revenues. For the moment mobile revenues are at a point of ~25% of the online revenues. But they are growing fast. Due to this, we’ve tripled our investment in the mobile team across the different layers and we are planning to almost double our offering in 2013 from about 14 games we have today to as many as 25 early next year. There will be a focus on optimized versions for Tablets as well as mobiles.
Lastly, an important part of an effective online program is its ability to cross-promote with land-based retail, and otherwise enlist the support of retailers.
I. Rosen: Obviously the issue of how to get the retailers support is of a highest importance to lotteries in the US. I know that US lotteries have been shown numerous cases from Europe demonstrating that launching online did not hurt retail sales at all. Actually, retail sales grew even though the approach of European lotteries did not include deliberate strategies to support their retailers, certainly not to the extent that North American lotteries are doing. One strategy I have seen for helping the different channel partners to adapt to change is to identify the 5% who are leaders and focus on them and get their support. Change of any kind relies on the leadership of a small group of early-adapters. Once others see how change benefits them, they are more willing to jump on-board to be a part of the leaders of the future. The case of Loto-Quebec and how they have built a cooperative relationship with their retailers is impressive. They have shown that it’s not only possible, it actually benefits all parties including retailers.
We just need to communicate with all our channel partners that an effective online strategy both expands the market by bringing in new consumer groups, and engages the current customers in a multi-channel approach. As has been repeated in various interviews in your magazine, Paul, the lottery player who buys through more than one channel is a much more engaged and loyal customer. Everyone wins, including the land-based retailer. And this fact is being demonstrated in lotteries all around the world.