Automated Draws vs.

Numbered Ball Drawings

Tennessee Education Lottery

2

Objective and Business Drivers

• TCA § 4-51-101 (e):

“The corporation shall strive to maximize net lottery proceeds.”

3

Guidelines for Maximizing Revenues

Statutory Guidelines for Accomplishing this Task:• Utilize the private sector perspectives of a large

marketing enterprise• Generate more revenue for the education programs

funded by Lottery proceeds by realizing operational efficiencies within the corporation

• Decrease operational expenses by employing lottery industry best practices

4

Guidelines for Maximizing Revenues

• Maximize participation of minority-owned businesses to achieve a minimum participation goal of 15%

• Enhance the business expertise of Tennessee retailers—to assist them in achieving optimal sales levels

5

Situation Analysis

• Contracts for televised numbered ball drawings with all 6 stations expired in March 2007 – Cost to the lottery annually = $253,667

• Projected cost with new television contract terms will be approximately $4,811,115 annually

TV Draw Cost Increase(as of March 2007)

$0.25

$4.80

$0.0

$1.0

$2.0

$3.0

$4.0

$5.0

$6.0

Previous Cost Projected New Cost

Mill

ion

s

$4.5 million increase

6

Cost Breakdown

Market Station Est. Annual Airtime

Nashville WKRN $967,201 Memphis WREG $693,159 Knoxville WBIR $1,051,648 Chattanooga WTVC $507,624 Tri-Cities WKPT $380,952 Jackson WBBJ $669,864 Airtime total = $4,270,448 Production, Draw Staff, Auditor = $540,667

Total = $4,811,115

Estimated TEL Cost Breakdown to Continue Drawings after March 2007

Source for airtime estimates : Gish, Sherwood & Friends, Inc.

7

Sales By Product

Tennessee Education Lottery Corporation Sales By Product Inception to March 31, 2007

Source: Tennessee Education Lottery

MILLION $ MADNESS $4,007,000

0.1%

POWERBALL $502,933,000

16.4%

LOTTO 5$66,816,000

2.1%

CASH 4 $50,746,000

1.7%

CASH 3 $206,415,000

6.7%

INSTANTS $2,239,613,000

72.9%

HOT TRAX$1,893,000

0.1%

8

Market Analysis

• The trend in the lottery industry is moving away from numbered ball drawings and using the more cost effective automated draws

• Domestically, 41 or approximately 95% of lotteries rely on some type of random number generator for online game draws1

• Powerball has recently voted to use a random number generator to determine the Power Play multiplier number

1. This number includes lotteries offering monitor games like keno, and those that conduct raffles using random number generators.

9

Market Analysis

State Lotteries Relying on Automated Draw Technology

WA

OR

CA

NVUT

AZ

ID

MT

WY

CO

NM

ND

SD

NE

KS

OK

NY

MN

IA

MO

AR

LA

MIWI

IL IN

KY

TN

MS AL GA

SC

OH

WV

PA

VA

NC

VTNH

MA

CTRI

ME

MD

TX

NJ

DE

FLAK

HI

D.C.

Lotteries using automated draws

Non-lottery states

41

*Rely on RNG for at least one draw game.Source: State Lottery Websites

10

Situation Analysis

• On July 28, 2007, the Lottery transitioned to automated draw technology for:– CASH 3

– CASH 4

– LOTTO 5

• Lottery uses two automated drawing machines as random number generators, and all 6 television stations air an animated version of the draws

11

CASH 3 and CASH 4 Sales

Summary of CASH 3 and CASH 4 SalesFY08 vs. FY07 (July 28 - October 18)

FY07 FY08 Increase (Decrease)

%

CASH 3 $13,465,155 $14,137,476 $672,321 +5%

CASH 4 $5,395,024 $5,484,989 $89,965 +2%

Source: Tennessee Education Lottery

Summary of CASH 4 / FY08 vs FY07July 28 - October 18

$5.34$5.36$5.38$5.40$5.42$5.44$5.46$5.48$5.50

FY07 FY08

Mill

ions

Summary of CASH 3 / FY08 vs FY07July 28 - October 18

$13.00

$13.20

$13.40

$13.60

$13.80

$14.00

$14.20

FY07 FY08

Mill

ions

+5% +2%

12

Education Fund Transfers

Summary of Transfers to Lottery For Education Account

FY07 vs. FY08(July 1 – September 30)

FY07 FY08 Increase (Decrease)

%

Transfer $62,281,000 $67,756,000 $5,475,000 +8.7%

Funding to the Lottery for Education Account increased by nearly 9% compared to same period last year when numbered ball draws were being conducted versus automated draws.

Source: Tennessee Education Lottery

13

Cost Estimates to Return to Live Drawings

• Estimates are based on 1,612 shows per year and include satellite transmissions, talent, set, secure storage, cameras, etc.– :30 CASH 3 x 13 per week– :30 CASH 4 x 13 per week– :30 Lotto 5 x 3 per week– :30 Lotto Plus x 2 per week

North Star Shop at Home

WKRN Audio Prod. Stage Post

Vendor Estimates $628,680 $643,200 $965,420 $1,300,728 $4,123,500

Draw Staff, Auditors & Maintenance

$253,667 $253,667 $253,667 $253,667 $253,667

Annual Cost Totals* $882,347 $896,867 $1,219,087 $1,554,395 $4,377,167

*Note: Annual Cost Totals do not include taxes.

Source: Gish, Sherwood & Friends, Inc.

14

Cost Benefit Analysis

Televised Ball Drawing Automated Draw

Production = $628,680 Air Time = $4,270,000Auditor = $132,850Draw staff = $117,000Maintenance= $ 3,817

Projected Annual Cost =$5,152,347

Projected 3 Year Cost =[$15,457,041]

Projected 5 Year Cost =[$25,761,735]

Cost Comparison

1X Purchase = $221,000Production = N/AAir Time = N/AAuditor = N/ADraw Staff = N/AMaintenance = $61,000

Projected Annual Cost = [$61,000]

Projected 3 Year Cost =[$183,000]

Projected 5 Year Cost =[$305,000]

ANNUAL PROJECTED SAVINGS = [$5,091,347]

15

Cost Benefit Analysis

• Lottery is projected to save $5,091,347 annually using automated draws

• Money saved contributes directly to:– Scholarships for Tennessee students to attend higher

education institutions in Tennessee. For example, $5,091,347 would fund approximately 1,273 HOPE scholarships of $4,000 each

– Pre-K and After-School Programs

16

Value Summary

• Automated draws translate into significant savings on operating expenses– Automated draws / use of RNG technology is

becoming a standard cost-effective practice for domestic lotteries

• Sales have remained strong since the introduction of the automated draws – Sales for CASH 3 and CASH 4 are up by 5% and 2%

respectively (year-over-year FY07 versus FY08)

17

Value Summary

• Lottery funding for education has continued to grow following the switch to automated drawing – Funding to the Lottery for Education Account increased

by 8.7% compared to same period last year (July 1-September 30)

• Savings by using an automated draw system will translate dollar-for-dollar into education funding