Unregulated gambling games cost Pa. Lottery $95 million in revenue, director says

A new type of quick-thrill game is popping up in bars and gas stations across the state, and it’s causing big problems for the Pennsylvania Lottery.

“Games of skill” — arcade-style betting games operated by private companies — have cost the state lottery an estimated $95 million in annual revenue, Pennsylvania Lottery Executive Director Drew Svitko said Tuesday.

“[Skilled games] are a direct competitor with the lottery,” Svitko told the state Senate Appropriations Committee. “It represents a long-term risk.”

A team of economists hired by the Pennsylvania Lottery determined that sales of scratch-off tickets plummeted in locations that also offered games of skill. Scratch-off tickets constitute 70 percent* of the Lottery’s annual revenue, according to Svitko.

“They’re an impulse item,” Svitko said. “They depend on people having discretionary entertainment dollars. There are only so many discretionary entertainment dollars to go around.”

The number of retailers offering skilled games has doubled in the last year alone, Svitko said. Eighteen percent of lottery retailers currently offer at least one skilled game kiosk.

The games proliferated after state lawmakers passed gambling expansion reform in 2017. The new law included a broader definition of slot machines, according to PennLive, and game operators were quick to argue it legalized games of skill.

Game companies also say that a 2014 court ruling, which required the State Police Bureau of Liquor Control Enforcement to return a video-game device it seized from an Aliquippa County civic club, gives them license to operate.

But lottery officials and the Pennsylvania State Police share the belief that the games of skill are not legal under Pennsylvania’s gambling laws.

Ongoing lawsuits against gaming companies, brought by the state Attorney General and local law enforcement agencies, could support that interpretation.

In the meantime, expansion shows no sign of letting up. Economists predict that the state Lottery’s revenue loss will grow as skilled games penetrate more of the gambling market.

These fast-paced games compete with lottery kiosks for space in retail locations across the state. Svitko said the Lottery has been unable to expand its own monitor games, such as slots and Keno, now that retailers have an array of entertainment options.

“Our sales reps work hard to develop relationships with retailers [and get] floor space and counter space for equipment,” Svitko said. “These machines absolutely hurt their ability to make it happen.”

Sen. Wayne Langerholc, R-Bedford, asked Svitko why the Lottery’s growing advertising budget has failed to reverse its falling sales figures. The agency spent $54 million advertising its products in 2018 — a $3 million increase over the prior two years.

Svitko explained that any business selling an impulse item has to compete for consumers who only have so much money and attention for entertainment. Everything from movie tickets to video games could be considered a competing good for lottery products, he said.

“There are lots and lots of entertainment options for consumers,” Svitko said. “We have to maintain our brand.”

Langerholc pointed out that the Pennsylvania Lottery is the only business of its kind in the state.

“I’m not buying it,” Langerholc said.

This story has been updated to correct the portion of lottery revenue generated by scratch-off tickets and information about a 2014 lawsuit.