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Scratch That Itch!: The California Lottery Was Limping Along Until It Changed the Game 

Tuesday, Sep 30 2014
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Lucky Day has two specialties: Chinese entertainment and the California Lottery.

The store in Oakland's Chinatown is crammed floor to ceiling with brightly colored DVDs and CDs bearing names like Highs And Lows and The World Is Lonely.

But Chinese entertainment isn't the store's main attraction. The stream of customers entering the store pays little attention. They are here to play the lottery.

Behind the counter at Lucky Day, and in a vending machine a few feet away, are thousands of lottery scratch tickets. They blend in with the DVDs and CDs, sharing the same eye-catching colors: loud yellows, greens, and reds. Orange and white "hits" — receipts from winning lottery tickets — paper the walls of the shop. In a corner, there's a shrine where customers can pray for luck.

On the day before Chinese New Year, people are in the streets, lighting firecrackers and celebrating. But Jason Li, who owns Lucky Day, isn't closing his shop early. He's busy selling scratchers, as the tickets are called. His customers, mostly Chinese, many older, ask Li to recommend scratchers. Some customers go out of their way to play here, buying their tickets and scratching them off on Li's counter. Losing tickets stack up to one side.

Tom Ko walks into the store and asks Li to pull a $5 Million Jackpot scratcher from the middle of the pack — Ko wants his lucky number. He takes the shiny blue $20 ticket and scratches it off on Li's counter. It's not a winner, so Ko moves on to other, less expensive tickets. "Only one, no good," he says.

Ko then pulls out a thick roll of $20 bills and lays down $300 in cash to buy scratchers. He finishes them one by one and leaves Lucky Day.

Li says many customers play the $1, $2, and $5 tickets, along with familiar draw games like Powerball and Mega Millions. But the $5 Million Jackpot, which costs $20, occupies a special space here. With its higher price come better odds and fatter jackpots.

"Twenty dollars sells very good," Li says. "Most people, they like this game." There's a poster for the game above the scratchers vending machine. "Biggest Scratchers Jackpot Ever," it proclaims, with a lottery ticket rising out of a pile of money. Li has taped a "hit" for a $1,000 winner to the middle of the poster.

When news of the expensive scratcher first arrived, Li says his customers exclaimed, "Oh, a $20 game [is] coming? Wow!" Li has had players come in and buy an entire roll of scratchers — 30 at once — at $600 a pop. And Li's players aren't alone: In the year since the $20 ticket launched, more than 20 million have been sold in California.

The $20 scratch ticket took a long road to arrive at Lucky Day. A pricing scheme that required a change in state law, a hyper-focused ad campaign aimed at dedicated players and Asian-Americans, and decisions about the color scheme: They were months, sometimes years, in the making. California Lottery spokesman Russ Lopez says the lottery believed this $20 ticket represented "an exciting new game at a new price point."

Lottery employees from other states describe the process of marketing a scratcher. "You are always taking a chance when you send a ticket out," says Lauren Luttrell, who manages scratch tickets at the Massachusetts State Lottery.

Ticket design is "as much of an art as a science," says Don Feeney, research and planning director of the Minnesota Lottery. "There's a lot of guesswork, and sometimes we guess wrong."

In the Golden State, decisions are made by the California State Lottery, a 760-employee government agency. This year marks the 30th anniversary of Proposition 37, which created the lottery in 1984. Since tickets first went on sale a year later, more than $74 billion in lottery tickets, including upwards of $34 billion in scratchers, have been sold by the California Lottery.

The California Lottery declined interview requests for this story, along with requests to tour its operations. Lopez writes that lottery employees had "little interest to participate," but agreed to answer "specific" questions about its business and the $20 scratcher by email. Other information was obtained through California Public Records Act requests.

While the Lottery and news outlets hype big jackpots and winners, those business operations, and making sure that players at corner stores are enticed to lay down $20 to hit the jackpot, fly under the radar.

What does it take to design a successful ticket? And how does encouraging people to gamble on the long odds of a winning ticket square with the California Lottery's stated aim of support for public education?

"'Education lottery' is an oxymoron," says Erik Owens, a religious ethicist at Boston College and editor of a book on gambling. While proposals to build casinos usually generate heated public debate, Owens says, "the lottery chugs along without controversy."

Until recently, more expensive scratchers — and the bump in revenues they bring — weren't practical in California. When Texas introduced a $50 scratcher in 2007, the most expensive scratcher in the Golden State cost just $5.

Sales were anemic. In 2007, then-Gov. Arnold Schwarzenegger floated the idea of privatizing the lottery, washing the state's hands entirely. Then sales fell even further and Schwarzenegger vented about California's "underperforming" system. Matthew Sweeny's 2009 book The Lottery Wars called the California Lottery "by many measures the worst in the country" and "an industry byword for weak lottery sales."

And there was high turnover at the top: The Lottery has burned through 20 directors and interim directors in just 30 years, including eight since 2004.

The Lottery saw troublesome restrictions in Prop. 37, which created the agency. When voters approved the measure in 1984, they capped the amount of money that could go towards prizes at 50 percent of Lottery revenues. The law also required the Lottery to return 34 percent of revenues to public education.

That made it impossible to offer the big prizes needed to attract players to $20 tickets. As the Lottery's Deputy Director of Business Planning Jim Hasegawa said at a conference last year, the law "really restricted what we could do with our scratchers games."

So the state changed the law. A new bill, AB 142, was introduced in the Legislature with the lottery's support. It also had the backing of GTECH, the Italian lottery behemoth that has contributed to campaigns by former L.A. Mayor Antonio Villaraigosa, Assembly Speaker Toni Atkins, and Gov. Jerry Brown. GTECH officially registered its support for AB 142, noting low payouts by the lottery to public education in California, and adding that "the formula is simple ­— higher prize payouts equal more sales and more net revenue."

AB 142 would erase the requirement that 34 cents of every dollar go towards public education. Instead, the Lottery would be required to return 87 percent of all revenue to the public, in the form of contributions to education or beefed-up jackpots. The Lottery's Lopez calls this "prize payout flexibility." And because the higher prizes meant bigger sales, the thinking went, the lottery's contribution to schools would grow along with them.

In 2010, the bill sailed through the California Legislature and was signed by Schwarzenegger. As an "urgency measure," it went into effect immediately.

After AB 142 passed, the Lottery "started really launching our higher price-point games," Hasegawa told the conference. First came a wave of $5 scratchers. Then, a year and a half later, the lottery introduced its first $10 scratcher. The game sold out in a matter of months.

But California still trailed other lotteries: As of last year it was one of only four state lotteries without a $20 scratch ticket. As a Lottery spokesman told the press last year, "California has really been sort of behind the times on offering this price point."

That changed on Sept. 25, 2013, when the first $20 ticket went on sale in California. Within a week, hundreds of thousands had been sold.

The machinery behind scratchers is complex: Their loud colors and enormous prizes are carefully calibrated by the Lottery and its contractors for maximum impact and profitability. Ticket sales are the California Lottery's only source of revenue for its own operations, and they also provide the money for its contributions to education and prizes.

The agency offers a variety of different games, like Powerball and the quick-draw Hot Spot game. But scratchers have accounted for nearly half of all Lottery sales since 1985. Setting the right prizes is critical in attracting players.

Luttrell, who manages scratch tickets in Massachusetts, says that regular players respond when grand prizes are massive, even when their odds of winning aren't. Massachusetts has the highest per capita lottery spending in the country by far, as well as the largest prize payouts — the percentage of ticket sales returned as prizes — at every price level.

"We kind of go by the 80/20 rule, where 20 percent of our players make up 80 percent of our sales," Luttrell says. Those "core players" are "playing those high-end games, they're chasing that huge top prize," she says.

The Texas Lottery has been at the forefront of the move toward more expensive tickets, introducing its $50 scratcher in 2007. Scientific Games, a New York-based company that prints scratchers, advised Texas and other states to invest in games with high jackpots, according to a New York Times report.

Scientific Games introduced the first scratcher in 1974. Today, the company does business with many of the country's 42 lotteries. It reported more than $1 billion in revenue in 2013, half of that from scratchers business. Scientific Games recently won a six-year contract with the California Lottery to provide scratchers.

The company's presence in California goes back decades: Scientific Games' contribution of $1.6 million to the pro-Lottery campaign was critical to passing Prop. 37 in California in 1984.

Lotteries don't just obsess over prizes; they also design the details of each scratcher, keeping an eye on color, size, and competition from other tickets. California's $5 Million Jackpot ticket is particularly eye-catching, printed on shimmering, silver and blue holographic paper.

"These tickets are a little bit like the 'ding ding ding' you hear on a slot machine," says Kit Hinrichs. Hinrichs, a designer based in San Francisco who has done logos for the University of Southern California and the Disney Museum, says the colors are loud, but blend together without leaving a lasting impression.

Lotteries consider factors like which colors are in vogue, and which are already on the market. Recent Massachusetts scratchers feature Pantone's color of the year, "radiant orchid." "Literally because it's a trendy color," Luttrell says.

Ron Fornaro, who manages scratch tickets for the Ohio Lottery, keeps a board of the entire year's tickets behind his desk. "I can see what colors are going on out there, if we need more purples out there, if I need a green, a blue," he says. Luttrell keeps a similar board in her office.

Scratchers are "impulse items," she says, so they need to look good and send bold messages. "Ugly tickets don't sell. They really don't."

Feeney of the Minnesota Lottery says that designs start with vendors like Scientific Games. Lotteries keep up on the competition by looking at other states' tickets on a server maintained by Scientific Games, known as the "Game Gallery." The company's portal has images of more than 25,000 lottery tickets. Lotteries pay to browse and find inspiration from the Game Gallery.

"Lotteries steal shamelessly from each other," Feeney says.

The California Lottery printed 33.6 million of its $20 scratchers. The tickets went on sale in September 2013 at more than 20,000 retailers across California.

Just sending the sparkling $5 Million Jackpot ticket into stores wasn't going to cut it. The Lottery needed to get the word out to players about the brand new, more expensive offering. But there were "limited marketing dollars," Hasegawa said at the December conference, with other initiatives — including the launch of Powerball in California — eating up ad money. "So in order to market the $20 game, we really had to advertise it to its most likely buyers, and do it with great precision," he said.

Reaching the right players is crucial. Nationwide, about 5 percent of lottery players — not just of scratch tickets, but all lottery games — contribute more than 50 percent of all lottery receipts. "What that tells us is that there's a definite target for the marketers of the lottery," says Erik Owens.

High school dropouts and African-Americans spent disproportionately high sums on the lottery nationally. The California Lottery estimated that Californians from all racial backgrounds play the lottery in rough proportion to their prevalence in the population — for example, whites in California make up 47 percent of the adult population and represent 45 percent of lottery players. But the information released by the California Lottery doesn't identify demographic information about "core players," the small minority of players who account for a large percentage of revenues.

The Lottery had an idea who they were. To reach players willing to spend $20 on a single ticket, the agency seized on two sets of data. One was the forms filled out by lottery winners. The other was the lottery's database from its 2nd Chance games, which allow players to submit as many as 1,000 losing tickets (the Lottery calls them "non-winning") into drawings each month. In these drawings, even losing tickets can become winners.

Hasegawa and others at the lottery focused on players in the databases who were purchasing $10 scratch tickets, then the priciest on the market. They also sent out a questionnaire to players of such games. "A very high proportion were coming from Asians," Hasegawa said. About 20 percent of sales from a group that represents 14 percent of the population, he told the industry conference.

Asians tend to play the lottery less than other groups, though a 2006 report by the California Office of Problem and Pathological Gambling noted that gamblers in the Bay Area were more likely to be Asian than in other parts of the state.

To promote the $20 scratcher, the Lottery launched a campaign targeting two specific groups of players. It was the first dual campaign in the lottery's 29 years. One target was likely players, Hasegawa said, who were identified as younger, male, and with higher incomes than the Lottery's regular base. The other group was Asian-Americans. The Lottery saw an opportunity with the new ticket to reach these players.

With that strategy in mind, the Lottery handed the torch to its ad agencies, with the message to get players to "really embrace the biggest instant scratchers jackpot ever," Hasegawa said. Higher jackpots, the agency hoped, would drive sales of more expensive tickets.

Time Advertising crafted a TV spot for Chinese, Korean, and Vietnamese speakers. The ads feature a split screen with two images of a brawny young Asian man. On the left, he's a man of modest means: He stuffs his Mini Cooper with cheap luggage and gives his disappointed fiancée a tiny diamond. On the right side, the same man sips champagne in a limousine and impresses the same woman with a gargantuan diamond. It all hinges on his decision to buy a $20 scratcher.

Hasegawa told the conference the Asian-language ads were "driving home the message of 'bigger is better' and the sheer size of the $5 million jackpot." Lottery documents describe the message of the ads as: "It is the biggest California Scratchers ever, go buy it now!"

"It's concerning," says Kent Woo about the ads. Woo is executive director of the NICOS Chinese Health Coalition, which runs a hotline and programs to reach problem gamblers in San Francisco's Chinatown. "One, because the lottery tickets are so much more expensive than what we're traditionally used to. But also because it portrays hope in terms of making money off the lottery."

He says that the California Lottery's direct marketing towards Asian-Americans, which is common in casino advertising, "is a bit of a concern, especially since the Lottery is something that's state-run."

Lottery spokesperson Lopez downplays Woo's concerns: "When the Lottery purchases advertisement in ethnic media it is because the Lottery's research has indicated that particular markets enjoy particular games."

To expand, the Lottery needs to overcome perceptions that dissuade people from buying its tickets. Its latest business plan addresses these issues, among them: "perception of types of stores where tickets are sold and type of people who buy tickets — particularly Scratchers." A quarter of scratchers are sold at liquor stores.

In marketing $20 scratchers to dedicated players, the California Lottery relied on radio broadcasts around the state, many from liquor stores. Targeted online ads placed piles of cash next to landmarks like the Golden Gate Bridge and Lake Tahoe. The agency bet its big-money message would entice players.

In the week after the $5 Million Jackpot launched in September 2013, players bought 860,000 tickets. At $20 apiece, sales totaled $17.2 million, a figure a Lottery press release trumpeted as "extraordinary."

The $20 scratchers were a hit. And they pulled up sales of other lottery tickets with them. That week, the Lottery sold more than $66.8 million worth of all types of scratchers, which was the most of any week in the California Lottery's history. The higher overall sales, Hasegawa said, showed the players weren't simply spending the same amount of money on more expensive tickets. They were spending more on tickets in general.

Early big winners included an L.A. hairdresser and a Temecula retiree — and the California Lottery. Hasegawa told the lottery conference that scratcher sales as a whole had been lifted by more than 10 percent since the launch of the $20 scratcher.

Hasegawa speculated that the targeted marketing drove sales. "What we spent on media for the $20 game effort was less than one-sixth of what we typically would spend in the less-targeted campaigns," he said, citing the ubiquitous holiday ads for scratchers. Unlike those holiday ads, which blanket television shows and adorn bus stops throughout the state, the $20 scratcher was promoted by a handful of radio broadcasts, Asian-language TV spots, and online ads.

Despite the financial success, the marketing blitz may not have worked exactly as intended.

The Lottery collects demographic data about its players, as state law requires. Since the launch of the $20 game, its surveys indicate that it may have only partially reached the target demographics. Nearly 5 percent of adults in California said they had played a $20 scratcher, according to the Lottery, including about 3 percent of Asians. Lopez notes that "Asians have traditionally had lower rates of Scratchers play than Californians overall." Lopez didn't respond to a question about whether or not the Lottery considers the targeted marketing towards Asians a success.

In the survey data, players of the $20 scratcher emerged as younger, male, and more likely to be Hispanic or African-American than the population at large; the Lottery no longer collects information about the education level of its players.

By mid-September 2013, more than 22 million $20 scratchers had been sold.

All the effort put into the $20 scratchers — the fatter jackpot and higher ticket price, the design decisions and the highly targeted marketing — has paid off, at least for the Lottery. But that success may come at the expense of vulnerable people.

Erik Owens, the Boston College ethicist and editor of the book Gambling: Mapping the American Moral Landscape, says that for lottery players, "the less education you have, the more likely you are to spend more money."

It is "deeply ironic that lotteries are pitched to consumers and voters who consider them as education lotteries, or that they're somehow improving education," Owens says. "Because the simple fact is if they work, if they improve the education of the people in that society, they would buy fewer lottery tickets. And that would sink the whole ship."

For the 2012-2013 fiscal year, the most recent full year for which data is available, the California Lottery contributed $1.3 billion to public education and spent $2.7 billion on prizes. About 60 percent of revenue goes to prizes, 28 percent goes to public education, and 12 percent goes towards administrative expenses.

Which means that in the last school year, the lottery contributed just over $1 billion to K-12, through the Department of Education (about $250 million went to higher education and other programs). That contribution has ticked up in recent years, but it's not much higher than it was in 2007. Lottery funding makes up only 1.5 percent of the DOE's massive $70 billion budget.

"We supplement, not supplant, public education's budgets," and make "modest contributions" to education funding, Lottery spokesperson Lopez says in an email. "We don't sell our Lottery as a 'solution' to education's budgetary issues, nor do we claim that our contributions to public education are responsible for improving schools."

"Any kind of additional funding that a school in California can receive is a meaningful source of funding," says Department of Education spokesman Giorgos Kazanis about lottery funding. But he adds, "in reality, it's just a fraction of the schools' actual funding. That's the biggest misconception."

At Lucky Day, scratchers arrive in inconspicuous white UPS packages. Li, the owner, activates them by scanning a barcode. Until he does this, the $20 scratchers are worthless.

Li doesn't spend much time thinking about the efforts that went into the design of the scratchers below his counter at Lucky Day. Asked about the different colors, he shrugs. Sales are "almost the same, every game. Just depends on the people." Not all customers at Li's Chinatown store are Asian. White, black, and Hispanic players come here from nearby neighborhoods and downtown jobs.

On this weekday morning, James Salazar walks into Lucky Day. It's his second visit today; he's here to redeem the $20 scratcher he bought earlier. His winnings: $20.

Salazar doesn't think much about the color of scratchers either. He's a regular player who says he chases "the green color" — money. He's never noticed a hologram on the ticket before. He pulls one out and stares at the shiny surface. "No, nothing like that. Looks don't attract me."

Salazar says he's come out ahead playing scratchers, and won $5,000 last year. He hasn't heard of AB 142 or the changes in Lottery regulations, and seems surprised to learn more than half of Lottery revenues go towards prizes. His view of the Lottery is dim: "I tell you this, the California Lottery is a kind of rip-off organization," he vents. To get the bigger jackpots, "you have to play 10 million times." Salazar gets frustrated scratching off losing tickets, but he has nowhere else to turn. The California Lottery is the only game in town.

Salazar walks briskly from Lucky Day to his job at the county courthouse. He works in IT, a field he calls "easy money." He says he's frustrated by the small winnings he's seen from the Lottery lately. He plays scratchers for "the money part, the big money part. I don't care about small."

For players like Salazar, there's now a second $20 scratch ticket: "Million $$ Match." The odds of winning a top prize are one in six million.


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Aaron Mendelson

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