New content, online potential to drive China’s booming lottery market

China’s lottery market is booming, gaining 18.3% to 309 billion RMB ($50.6 billion) in 2013, though it has barely scratched the surface of its massive potential, according to participants at the iGaming Asia Congress 2014.

Going forward, improved content and the advent of online gambling is likely to drive growth, with 2014 being seen as a pivotal year, they said at the event in Macau from March 4th to 6th.

Although it’s already as big as the industry in the U.S., China’s lottery still has a long way to go in terms of growth, said Geaspar Byrne, head of corporate development, strategic planning and IR at AGTech, adding that double-digit growth rates have been maintained over the past five to ten years.

Gambling in China has been prohibited since 1940, but an exception was made for the lottery, which was established in 1977, with two permitted operators: the China Sports Lottery and the China Welfare Lottery. These titles reflect how proceeds are used, for instance, funds accrued from the China Welfare Lottery are poured into community causes.

Despite the size of the market, the current participation rate is poor.

“If you look at penetration through gross gambling yield as a proportion to the GDP, China is only 20 basis points spent on lottery, a low proportion compared to other regions, which suggests there is a lot of grey market [in the country],” Byrne said.

Zhengming Pan, chief financial officer of 500 .com, the only legitimate online distribution platform in China, estimates the underground betting market could be ten or twenty times bigger than the legitimate market.

Representatives from China’s state-run operators revealed recently to the World Lottery Authority that penetration rates in China are somewhere between 7 and 8 percent. “That’s incredibly low when in most countries it’s over 50 percent,” Byrne said.

There may be a variety of reasons for the low participation rate in the world’s most populous nation, such as an issue with payout ratios.

For high-frequency games, sports betting and Video Lottery Gaming, the payout ratios are between 59 to 69 percent, which is uncompetitive compared to the illegal market, Byrne said.

John Sun, chairman and CEO of AGTech in another panel discussion on the future of remote betting and wagering in the mainland said that China’s 7-8 percent penetration rate compares to more than 80 percent in Thailand.

Part of the problem may be the content of the games on offer, as currently the lottery industry in China is not on a par with international standards, Sun says.

“Even though China Welfare and Sports lottery have 300,000 points of sale daily, most of them are not presentable to international punters as this is not the type of shop for middle to upper-class people to go for,” Sun says.

He says the opening up of the online space may help to improve standards and provide the kind of rich content needed to push the market to the next level.

Recent moves by the government show the state is starting to embrace the online gambling frontier, with the arrival of sports lottery operator 500 .com.

Shenzhen-based 500 .com offers betting services through the Web and mobile applications. Its user base more than doubled to 18.4 million at the end of September from 8.8 million in December 2010, according to a recent  regulatory filing.

“This is the beginning. It’s also the way to attract those middle or upper-class people to participate [in this sector],” Sun says.

He adds that the government  is considering a formal licensing policy, which may  be published this year, permitting online and mobile gaming in this sector of the market. “We believe 2014 could be very crucial [time] where we will see big milestones in the lottery history in China,” he said.

500 .com’s Pan also sees huge opportunity ahead, especially on the mobile front, as the rise in smartphone users will make online wagering far more accessible.

“In China, all you need is 1000RMB ($163.4) to have internet to have access to lottery (products,)” he said.

Mobile technologies, social media and their relation to sports betting dominated discussions on the last day of the conference, with participants saying that a lack of sophistication in online cash processing may be crimping growth.

Paul Fox, head of sports books at Bodog Asia, said Asia has “massively” lagged in the mobile revolution when it comes to wagering on sports, partly due to the limitations in web cash processing in this region.

Mobile money, and in particular the ease with which you can deposit and withdraw funds, is integral to the online betting business. Currently in Asia, the cashier process is quite convoluted. “You have to log in from your laptop on your main site, deposit cash there and (only) once the funds are in the account can the customer make a bet,” says Fox.

He said the multi-step process is “far from ideal” and in sharp contrast to the ease with which U.K. customers can withdraw cash directly from mobile devices. Once the web cashier process is more refined in Asia, he foresees a significant shift in the digital wagering market.

When it came to social media, industry experts were divided on how to use and monetise the medium. Fox says Bodog has paid little attention to this channel, since restrictions are still in place in countries such as China, making popular sites such as Facebook inaccessible.

However, Bernard Marantelli, CEO of Colossus, said he relies on social media since it allows companies to act quickly to take advantage of marketing opportunities, in contrast to traditional avenues such as TV advertising where spaces are usually booked almost a year in advance.

On the theme of live-game streaming, there was a consensus amongst panel speakers on the positive impact this technology has had on operators. John English, Betfair TVG’s senior vice president of business development in Asia and the Americas, says it’s both a revenue generator and marketing tool for the company, where live-streaming has become a big portion of its business.

“People like to wager on what they can see,” he said.

Suren Khachatryan, CEO of BetConstruct, also said his company has reaped rewards since streaming was integrated to its providers in the last few years. “Overall we’ve seen an increase of 30 percent in the amount wagered on games televised on web browsers.”

“Streaming would definitely help any operator in Asia,” he adds.

However, the benefits haven’t yet spilled over to mobile streaming, unlike in other parts of the world.

“There’s been an uptick via mobile in other parts of the world, specifically the U.K. and in Australia, which has been sizable,” says Thomas Klingebiel, general manager of Asia Sports Digital. He says the company does have customers in Europe who use mobile-device streaming products but they have yet to see any demand from the Asian region.

Klingebiel suspects payment processing limitations may play a role in the poor demand.