Inside Asian Gaming

June 2008 | INSIDE ASIAN GAMING 17 All forms of gambling were outlawed in China following the communist revolution of 1949. The country only introduced lotteries in 1987, but now, according to a Citigroup forecast, it is on track to becoming the world’s second biggest lottery market by the year 2010. China’s booming lottery market got its start under Premier Deng Xiaoping, who realised that ideology had to give way to economic pragmatism if the Party was to survive, and introduced his“socialismwith Chinese characteristics”from the late seventies. This,alongwith the recognition that illegal gamblingwas rampant in the country, prompted the introduction of welfare lotteries in 1987 in order to provide a regulated outlet for mainlanders to fulfil their gambling desires, with lottery profits going to fund social welfare—the need for which has increased as a result of the economic reforms, which led to massive layoffs from state-owned enterprises. Two agencies oversee lotteries in China. The China Welfare Lottery Issuance Centre (CWLC)—the larger of the two—was established in 1987 to raise funds for social welfare. The China Sports Lottery Administration Centre (CSLC) was set up in 1994 to fund sports development, and in addition to lottery-type games, also offers limited football betting on matches in the major European leagues. Although Macau is likely to remain the only place in China where casinos are allowed, the Chinese government has sought to expand the range of legal gambling options in the country. Prior to 2003, the CWLC only offered two games, lotto and instant scratch cards. There is clearly considerable pent-up demand for more gambling options in China. Following the launch of a simple new game, 3D—in which players pick a 3-digit number from 000 to 999—lottery revenue soared 80% year-on- year in 2005. In order to offer even greater gambling choice, the Chinese government introduced high-frequency lottery games in mid-2005. There are two types of high-frequency lottery games available in China. Unlike traditional lotteries, where drawings are typically made once or twice a week, new technology allows drawings to take place either every 3 to 5 minutes, as with the Keno network, or even instantaneously through Video Lottery Terminals (VLTs). The high frequency games have proved a big hit. China’s lottery revenues rose 22% to more than 100 billion renminbi (13.8 billion) in 2007, and more than half that growth came from VLTs, which generated revenue of 4.5 billion renminbi in the last quarter. VLTs now contribute roughly a quarter of the CWLC’s revenue, and given the rapid pace of expansion of the nationwide network of machines, Daniel Liao, deputy chief executive of China LotSynergy (CLS), expects VLT revenue to grow 50% this year. The first VLT hall was opened at the end of 2004, and by the end of last year there were 22,077 VLTs across the country, and an average of 1.5 new VLT halls (with 20-40 machines) were opening each day across the country. According to a report in the Financial Times , Mr Liao believes keno has greater growth potential than VLTs, because the latter can only be operated in dedicated gaming halls,whereas keno can also be offered in karaoke lounges, coffee shops and foot massage par- lours and the network will be able to support other games as well. “My personal view is that keno definitely will be bigger than VLT,” says Mr Liao. CLS first announced its contract with the welfare lottery for a national keno network three years ago. But the roll-out has been delayed as local governments, some of which had set up keno games with other foreign suppliers, sought to put their imprint on the system. Australia’s Tabcorp, CLS’s original keno partner, withdrew last month after losing patience and was replaced by GTech, the US- based lottery unit of Italy’s Lottomatica. Mr Liao told the Financial Times on Wednesday that bureaucratic hurdles had been cleared: “The whole system has passed verification by every province. Different provinces have different ideas about what would be the most attractive to their customers,” he said.“It was a very tedious process.” The initial roll-out will involve 2,000 terminals being set up in eight provinces, with another 2,000 to follow. Despite Mr Liao’s optimism about keno, other analysts, while impressed with the success of VLTs in China, are more cautious on the outlook for keno. “This game is still not proven in China,” Deutsche Bank commented in a research report: “It will take at least six to nine months for [the] new game to be successful.” China’s high-frequency lottery games: Keno involves players choosing two to eight numbers from 1 to 80. A central computer system randomly selects 20 numbers out of the total 80, and players receive payouts depending on howmany of the numbers they picked fall within the selected numbers. According to ancient records, Keno is said to have originated in China almost 3,000 years ago to fund military provisions, and was even said to have helped pay for construction of the Great Wall. It was brought to America in the nineteenth century by Chinese immigrants, and it was in the US—which accounts for over 70% of Keno sales worldwide—that the game really took off. Keno draws take place once every 3 to 5 minutes. Keno terminals are now available in a wide range of locations, including restaurants, karaoke lounges, coffee shops and other food and beverage outlets. All that is needed at the point of sales is a ticket issuing machine and monitor for displaying results, with both linked to the centralized operating system. Although only Keno itself is available through this network in China, the system can generally support four to eight different games. In Australia, virtual horse and car racing are also offered through the Keno network, and the government is expected to approve more games in the near future. Video Lottery draws are instantaneous, taking place at the touch of a button. Video Lottery Terminals (VLTs) are virtually indistinguishable from slot machines, and any game that can be played on a slot machine—including poker, baccarat, roulette, mahjong and dice games—can be played on a VLT. The difference between slots and VLTs is that slots determine draws by means of an internal random number generator, whereas VLTs are linked to a centralized operating system, which determines the results.The system allows lottery officials to keep close tabs on money wagered and prize money paid and to add new games without changing equipment. Video Lottery Terminals are restricted to parlours operated by Beijing Lottery Online Technology (CLO), and through the centralized system, offer a single mega jackpot.The CLO halls are financed, built and operated by provincial and municipal welfare lottery centres. All CLO parlours feature a standardized layout of 200-300 sq. metres in size, with 20-40 VLTs and one Keno monitor. Instant Gratification The evolution of high frequency lottery games in China