To the best of my knowledge, most lotteries are state run, so you’re not gonna find out what their cost structure / payout ratio / profitability measures are. However, there is a publicly traded lottery company out there.
Just pulled up their 2010 Annual and gave a look through. Looks like operating margins of 17% in 2010 and 2009, net margins of about 11%, and asset turnover of about 4x. So yeah, pretty, pretty, prettayyyyyyyyy profitable. Company also discloses that their payout ratio (their largest cost) to winners is around 67%. So in this case, yes, damned profitable.
It’s also trading at 4.2x TTM earnings, though management just burned through a big chunk of cash acquiring 35,000 video lottery terminals. I also have no clue what the regulatory protection for this company is like - if they’re the only player in this space or if there are others, what kind of difficulties would be involved in setting up another lotto company. Balance sheet also gives me a little pause (3/4ths of their assets are intangibles) and most of those were added recently with the acquisition. Stock price is down by 50% over the past year (POSSIBLE EXPLANATIONS INCLUDE THAT THIS COMPANY IS LOCATED IN GREECE AND I DON’T KNOW IF YOU SAW THAT THING IN THE NEWS, BUT I THINK GREECE MIGHT BE IN TROUBLE OR SOMETHING).
So, the question is, who wants TO BE A MILLIONAIRE to own a Greek lottery company? STEP UP, fellas, an opportunity like this only comes along probably every few years when Greece is in fiscal trouble once in a lifetime.
I think probabilities and stuff like that go out the window when you’re talking that kind of money. I play $10 or $20 on the Mega and PowerBall when they get over $300MM. I know I’m not going to win, but the utility of $20 is basically zero for me (not that I’m some super rich guy lighting cigars with $100’s), while the utility of $100MM+ is off the charts.
TIL that Oregon’s lottery had 1B in revenues in their 2011 fiscal year but only paid out less than $210mm in prizes. To be fair, they have another $140mm in ‘prize liabilities’, but that totals up to a prize payout of about 35%. They also had operating margins of about 50% and turned their assets nearly twice. Sweet jesus, the lottery is an attractive business.
Maybe you could start a business where you buy as many lottery tickets as possible (so you have a high chance of winning multiple lotteries). Then you sell tickets on this basket of lotteries. So, buyers of your basket lottery tickets have a chance to win $640 million, plus $200 million, plus whatever is in your basket. You can advertise something like “OMG $1 billion jackpot!”
This is taking advantage of the observation that lottery ticket buyers are attracted to large numbers, but are basically blind to statistics. Recall that lottery ticket sales surged when the jackpot reached $500 million. These new buyers ignored the fact that the number of buyers was also increasing and thus, their expected outcome did not improve.
There was an investor group that tried to buy every possible combination of either PowerBall or MegaMillions several years ago. The logistics ended up being a nightmare and they were not able to buy several thousand of the possible combinations because some of the vendors backed out of agreements to run their slips. I think they did end up with the winner though and added a few million by getting 4 or 5 numbers without the powerball or megaball. Return wasn’t spectacular though if I remember correctly.
I’m not sure if it was the same story, but I read an article about a year ago about a guy who did effectively the same thing. He couldn’t figure out how to make any money, though, since he would have to have the store clerk show him every ticket before making a purchase.