1,200 keno terminals gather warehouse dust State overestimated interest in game

THE BALTIMORE SUN

More than 1,200 lottery terminals worth nearly $10 million are sitting unused in a Howard County warehouse largely because state lottery officials overestimated the market for Maryland's flashy new keno game.

The state has already paid GTECH Corp., Maryland's primary lottery vendor, $5.6 million for 750 of the machines and has agreed to pay an additional $3.9 million for the remaining 523 next March.

Financing is to be spread over five years, which means in the coming year, taxpayers will pay at least $225,000 in interest alone for equipment that may gather dust for months.

Even if the agency can find 100 new locations a month for the terminals -- a pace it admits it may have difficulty achieving -- it would take a year before all the warehoused terminals could be put into service.

Legislative analysts say it more likely will take two years.

The problem -- a glut of already-paid-for lottery equipment with no place to put it -- demonstrates that Maryland's market for gambling is saturated, the analysts say. That explains why keno continues to siphon away players and money from more traditional lottery games rather than bring in new customers, they say.

Lottery officials say it is not entirely their fault that the equipment, ordered a month before the keno game was launched in January, is idle.

If keno had not suffered from so much adverse publicity almost from the moment the governor announced it last fall, if legislators hadn't tried to prohibit the game and if a lawsuit hadn't threatened to stop it, they say, the terminals might have been installed by now.

"There's no way we could have predicted what happened," said Martin R. Goldman, director of marketing for the Lottery Agency. "We did the best we could during that time period, but [negative publicity] obviously dramatically hindered our recruitment" of new outlets.

Lottery officials initially predicted that 1,800 keno outlets would be up and running in the first six months of 1993.

But after nine months, barely 1,100 are in operation, and expansion has slowed to a trickle.

"What happened was that no one anticipated some of the impact the political climate was going to have on rolling out this game," said Craig Watson, vice president for public affairs for GTECH.

"June would have been an easily made deadline for installation had that not occurred. The market would bear this number . . . of terminals for this game. That was carefully studied by both sides," Mr. Watson said.

New payment method

This is the first time the Maryland Lottery Agency has paid GTECH for equipment upon delivery rather than as it was installed.

Lottery officials sought the change to minimize the risk of starting the new keno game.

In the past, as terminals were installed, the state paid GTECH a fee for them based on an overall percentage of sales. As installations increased, so did sales and so did GTECH's commission.

But when the Lottery Agency decided to offer keno, it signed a contract obligating the state to pay a set price for the terminals as they were delivered.

The final payment was due in June.

Mr. Goldman said the lottery changed its method of purchasing terminals to a fixed price so it would know precisely what its costs would be for keno, a game with an uncertain future.

"We wanted to lock in our financial exposure," he said.

Lottery spokesman Carroll H. Hynson Jr. contended it is still "within the realm of possibility" that the agency will be able to find homes for the first 750 terminals, which cost $6,800 apiece, before the next batch must be paid for in March.

The equipment can be used not just for keno, but for any other "on-line" lottery games.

As many as 150 of the terminals are expected to be hooked up with new instant-ticket vending machines that are to be delivered this fall, Mr. Hynson said.

Meanwhile, he said, the agency is "actively recruiting" new lottery outlets.

But when asked if bars, restaurants or other businesses are on a waiting list for terminals, he said, "Not at this time."

Finding locations

The task, officials acknowledged, is to find locations that will attract new lottery customers rather than steal customers from existing sites.

"We want to get them out, but we want to get them out in the right location," Mr. Goldman said. "The worst thing we could do is just put them out. That would destroy our existing relations" with lottery outlets, he said.

In the meantime, he said, the agency sees the equipment "as a nice backup."

When Maryland's entry into keno was first announced, revenues were boldly estimated at $100 million a year.

Now, Mr. Goldman said, the keno figure is more likely to be $60 million. He said that still represents the best per capita return achieved by any of the six states that currently offer the game.

"There were a lot of revenue goals thrown in our lap," Mr. Goldman said.

"It is extremely difficult, when introducing such a new game, to project what it is going to do. What we had to do was project the best possible scenario, and the environment we had was the worst possible environment."

Of criticism of keno, he said: "It's as if someone said to Babe Ruth, 'Hit 100 home runs,' but he only hit 60 and everyone said, 'Ah, bad year, Babe!' "

Source of revenue

On the strength of keno, gross lottery sales during the past nine months are up to $712 million from about $606 million during the same period last year -- a 15 percent increase.

The lottery remains the third largest single source of state revenue, although proceeds have remained essentially flat since To ignite new interest or rekindle the interest of players who have grown bored, the lottery has offered a variety of new games and twists to old ones.

To lure higher income players, the agency experimented with a $5-a-ticket game called el Gordo, which was a financial loser, and then tried keno. This fall, the agency expects to spend as much as $1.9 million in keno advertising, and it just finished mass mailing 562,000 coupons offering recipients one free play of keno.

To keep the instant-ticket game humming, the agency recently purchased 300 vending machines that will dispense tickets to players who don't care to buy them over the counter.

It also has begun to offer $2 instant-ticket games that have proven popular because they offer bigger prizes and more ways to win than the standard dollar rub-off game.

Other games off

But with the exception of the instant game, the statistics show that all other standard lottery games -- Pick 3, Pick 4, Lotto and Match 5 -- are off.

Legislative analysts say that proves keno is pilfering players from other games -- a common affliction of "mature" lotteries known as "cannibalization."

"A large part of these declines can be attributed to the introduction of keno," said Marc L. Nicole, the lottery analyst for the General Assembly's Department of Fiscal Services.

Despite the introduction of new games, the lottery collected only $300 million in net revenues in the budget year that ended June 30, or almost $50 million below the amount originally predicted.

In December, the state's Board of Revenue Estimates predicted lottery revenues for the budget year that ends in June 1994 would be $420 million.

But lottery officials now say that number is more likely to be $360 million, and legislative analysts say they will be surprised if it is as high as $340 million.

Teresa La Fleur, a Montgomery County resident who is publisher of trade publication called Lottery World, said that compared with other mature East Coast lotteries, Maryland's has performed well.

"Keno was the main reason why they did so well," she said. "A lot of other U.S. lotteries are looking at keno."

Maryland's situation with the excess equipment could have been worse: The state was supposed to pay for all 1,273 terminals upon delivery in June but balked at doing so for three months.

GTECH tried to get the state to honor its contract by threatening to tack on $48,000 a month in late-payment interest penalties.

The two sides finally compromised earlier this month with the two-stage payment plan, and GTECH agreed to drop its demand for interest.

"It seemed to be in everyone's best interests to negotiate a contract," said GTECH's Mr. Watson. "We get the money owed to us, they obviously get the terminals, and everyone is happy."

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