Upstart Firm Takes $121-Million Lottery Prize From Big Guys : State Lotto Contract Secures Place for GTECH at Apex of Gaming Industry

Times Staff Writer

There's Robert Stern, the "financial genius." There's Guy Snowden, the "driving force." There's Victor Markowicz, the "mad scientist."

If they sound like the sort of upstart trio that could take on the giants of the gaming industry and emerge victorious and rich, they are.

A few years ago, they assembled a little firm they called GTECH, which they set up in Rhode Island.

And together, with support from people like the rich Bass brothers of Texas and the endorsement of a tough Irish cop who once walked unarmed into a prison riot and talked knife-wielding inmates into surrendering, they bid on the largest lottery contract in the world--California's--and won it.

"This company has emerged, really from no place, to dominate the industry," said Edward F. McSweeney, a New York investment analyst.

Few in Industry Surprised

The fact that a financial midget like GTECH could knock off big guys like Control Data, General Instrument and Bally Manufacturing didn't seem to surprise anybody in the lottery business.

"GTECH's good. Very good," said Duane Burke, chairman of the Public Gaming Institute in Rockville, Md., a private research organization that pools and publishes information on the legal gambling industry. "They're aggressive. They're sharp. They're untainted. They didn't fall into it; they worked hard. . . .

"The others are diversified, into all sorts of things. GTECH has remained focused on gaming."

"More than anything else, the large companies lost sight of the customer, started moving money to the bottom line instead of advancing technology," said Ralph Batch, a former FBI agent and mayor of Short Hills, N.J., who headed the New Jersey, Illinois and Delaware lotteries before retiring last year. "GTECH didn't make that mistake."

New York Contract Landed

GTECH got the $121-million, four-year contract to set up a computerized "numbers game" on Feb. 14, just one day after the firm had won half the $105-million contract for the computerized lottery system in New York.

That means GTECH has won seven of the last nine state Lotto contracts--with about 70% of the lottery terminals in the United States--and has established itself as the overwhelming favorite in upcoming competition for new contracts.

Those are giant leaps for a company that had gross sales of just $8 million in 1981.

"Not bad for a bunch of amateurs," quipped Stern, the board chairman of GTECH.

Amateurs they're not.

Stern, 62, a native of Brooklyn who served as a Marine during World War II before training as an electrical engineer at the RCA Institute, started fussing with computers back in the 1950s, after he bumped into John Mauchly at the University of Pennsylvania.

It was Mauchly, along with fellow engineer John Eckert, who had developed the world's first electronic computer--the Eniac--in 1945 in response to the Army's request for a faster method of calculating the trajectory of artillery shells. In 1951, Mauchly and Eckert produced the first in a famous series of computers--the Univacs--that used magnetic tape for input and output data. Later, Mauchly started his own computer software firm.

"A friend called and said Mauchly was in trouble financially," Stern recalled. "I joined him in Mauchly & Associates. We did software and systems work, and we worked hard. He only slept two to three hours a night. It was a struggle, but it was fun."

By 1968, though, the firm was broke.

He said it was one of the few disappointments in a series of electronics companies that he founded or salvaged during the '50s, '60s and '70s. One built hybrid computers, another processed seismic data for the petroleum industry, a third developed the control systems for the Hawk missile. A fourth was Datatrol, a firm that provided computer-linked cash register terminals for department stores.

'Our Guiding Light'

"Stern's a financial genius," Snowden said. "He's been our guiding light financially."

Snowden, 40, was born and reared in Upstate New York. After studying at Syracuse University, he moved on to IBM in Yorktown, N.Y., "where I learned a lot about on-line computer systems."

In the early '70s, Snowden hooked up with Systems Operations Inc., a firm Markowicz had help set up as a consulting service for the gaming industry.

People who knew Snowden then said he immediately began leaving his mark on the industry.

"He's a driving force," Batch said. "And a capable administrator."

"Snowden has extremely good rapport with people, with customers," Markowicz said. "But his greatest asset is his vision."

If Snowden had the vision, Markowicz had the technical expertise and imagination.

Born in Russia in 1944, Markowicz is the son of Jewish refugees who fled east from Poland to avoid the advancing Nazis. Deported back to Poland after the war, the family emigrated to Israel in 1964, where Markowicz completed his studies in mathematics and worked on the development of that nation's first commercial computer.

He came to the United States in 1970, he said, "to have a look around. . . ."

"I started work on mini-computers, with a company in New York," he said. "I left the company with the president, and we became consultants. We were waiting for the big score."

Markowicz said he became "loosely associated" with Mathematica, a New Jersey think tank that advised the newly legislated New Jersey Lottery. Out of that association was born Systems Operations, the consulting firm that brought Snowden and Markowicz together.

"Victor became the architect of the re-emergence of lotteries in this nation," Snowden said. "He's the software guru."

"He's our mad scientist," said Leonard G. (Pete) Morrisey, GTECH's vice president in charge of marketing. "Victor brought the creative genius."

Working together, Markowicz and Snowden rapidly expanded their consulting business.

"We did 11 lottery start-ups," some of them overseas, Snowden said. "We were in on the ground floor, and it paid dividends."

Armed with the expertise they had gained in the gaming industry, Markowicz and Snowden left Systems Operations in 1976 to start a consulting firm of their own--Gaming Dimensions. One of their first customers was Datatrol--Stern's latest salvage project--which was thinking about expanding its terminal business into the lottery field.

Michigan was getting set to start up the kind of lottery system that is scheduled to appear next summer in California--a network of terminals at retail outlets through which customers can place bets, with the terminals hooked to a centralized computer complex that records every transaction.

"We submitted a bid (for the terminals)," Stern said. "We ended up getting the whole thing, and went on line in May of '77."

Four years later, with Gaming Dimensions still serving as a consultant and lottery contracts with Rhode Island, Ontario, Quebec and Connecticut securely under his belt, Stern felt "firmly established."

Struck Out on Own

That was when he, Snowden and Markowicz decided to strike out on their own, buying the gaming division of Datatrol and re-establishing it as GTECH.

"The Bass brothers put up $200,000 and we put up $200,000," Stern said. "They also put up a bank guarantee of $3 million."

When word got around that the Bass brothers thought the company was worthwhile, that enhanced the emerging company's image.

Through business acumen, the brothers--Edward, Lee, Robert and Sid--have parlayed an inheritance left by their great uncle, Texas oilman Sid Richardson, into a family fortune estimated by Forbes magazine at more than $3 billion.

Shy, almost reclusive men who declined comment on their interest in GTECH, they have shunned the spotlight while carrying off massive business deals that have included a $400-million purchase of Walt Disney Productions stock in 1984 that wrenched control of the firm from the late entertainer's family.

With the Bass brothers behind them, the men at GTECH continued to expand their business, winning contracts to handle computerized lottery systems in Singapore, the remainder of Canada, much of Australia, the District of Columbia and the states of Arizona, New Jersey and Ohio before their latest successes in New York and California.

"They started competing very effectively against the companies that previously had dominated the industry--Control Data and General Instrument," said Burke, the Maryland research firm chief. "They beat them on different things at different stages--performance (the ability to handle multiple transactions quickly), experience, price and service."

Some Challenges

That isn't to say that GTECH didn't stub its toe a few times along the way.

In Rhode Island, where Stern's Datatrol had won the state's initial lottery contract in 1978, the Providence Journal--Rhode Island's most influential newspaper--complained loudly when GTECH won a renewal of the contract without competitive bidding in 1984, at a price the Journal considered excessive.

That's when Maj. Pete O'Connell, the head of the Rhode Island Lottery since its inception--and, at 6 feet 7 inches, still an imposing figure at 64--proved a formidable ally.

He answered the Journal's criticism by telling state legislators that in renewing the contract with Datatrol-GTECH, he had followed state law permitting noncompetitive renewals and had worked out the best possible deal for the state at the best possible price.

"The best negotiator in the country," he said, "is Peter J. O'Connell."

His defense of his agency won praise from Democrats and Republicans alike, and the contract renewal stood. Nonetheless, O'Connell announced in December that when the current contract with GTECH expires in 1987, the new one will be let through competitive bidding.

O'Connell had earned fame earlier in 1978, when--as the second in command of the Rhode Island State Police--he had strode unarmed into the state's penitentiary and faced down rioting prisoners armed with knives, shears, clubs and pipes.

Legend around here has it that he felled the leaders of the revolt with a baseball bat. Contemporary news accounts make no mention of a bat; O'Connell says only that "a few of them may have stumbled."

$600,000 Loan Questioned

Another minor problem arose for GTECH when competitors loudly questioned the firm's dealings with the District of Columbia Lottery.

The company loaned the lottery's advertising subcontractor $600,000 at the same time GTECH was trying to win the bid there--a loan that later became part of a government investigation of the advertising agency.

Both O'Connell and Stern defended the propriety of the loan, and GTECH was never called to account for it. Nonetheless, an investigation of the matter, along with protests and a competitors' lawsuit, held up GTECH's contract with New Jersey for nine months.

And while the systems installed by GTECH had worked well--Arizona's reportedly functioned smoothly for an entire year without a single minute of downtime--momentary glitches have been known to surface.

On Feb. 21, the two independent auditing systems New Jersey uses to check its computations showed an imbalance of $144.

"It was a processing error," Joan Zielinski, the lottery director there, explained later. She said payoffs were halted for several hours--although sales continued unabated--while both systems were rerun and the error was corrected.

"You take a lot of heat from a thing like that," Stern said. "People call the papers and say they won $150,000 and weren't getting paid. But nobody lost anything. Now we'll build in some protective changes."

"These things happen when you're dealing with computers," Zielinski said. Asked if the ability to correct the error may have actually reinforced her confidence in the GTECH system, she replied, "Absolutely."

12,000 Terminals for State

Like other lottery industry figures, Zielinski said she "wasn't surprised" to hear GTECH had won the coveted California contract, which calls for the installation and maintenance support systems for 5,000 terminals by midsummer, with hookups for another 7,000 terminals to be installed at some future date.

"They have very good people, with no skeletons in the closet," she said, adding that the company has never failed to provide her with thorough and careful service. "And technologically," she said, "they're the most sophisticated in the country."

In his report recommending acceptance of GTECH's bid, California Lottery Director Mark Michalko said the firm's technical competence "far exceeded " that of the other qualified bidders--Control Data, General Instrument and Bally Manufacturing's Scientific Games division, which had won the contract, worth an estimated $40 million to $50 million, to provide the scratch-off tickets for California's "instant" lottery games that started last fall.

Stressing that GTECH's ability to produce outweighed the fact that its bid ranked only third-lowest in price, Michalko said the system demonstrated by GTECH handled "an incredible 400,000-plus transactions per minute on Lotto bets, more than three times the minimum required. . . ."

"In summary, the GTECH system is both state of the art and tested," Michalko said. "The GTECH profile shows a financially sound and extremely experienced corporation."

Reduced Holdings

To qualify for the California contract, persons holding more than 5% of a bidding company's assets must make a full financial disclosure. The Bass Brothers, unwilling to comply, sold off GTECH stock to reduce their individual holdings to 4.9%.

Even so, the Basses' remaining stock is estimated to be worth a total of about $48 million at current market prices--almost 250 times their original investment. Stern, Snowden and Markowicz, who also have sold part of their assets in GTECH, still hold stock worth more than $60 million, a 300-fold appreciation.

The New York and California contracts left GTECH's founders as happy as they are rich. Burke called the victories "a fantastic coup" that entitles the firm to "both champagne and dancing in the streets."

But Snowden cautioned that there are new responsibilities as well.

"The company has to take steps now as the industry leader, not the entrepreneurial skyrocket," he said. "It requires a change in our countenance and philosophy."

Recalling the days when GTECH was still clawing its way to the top, Snowden said: "Our image shouldn't be so scratchy."

But Stern was quick to add that he, Snowden and Markowicz "don't intend to sit on our tails. . . ."

Harold Vogel, a Merrill Lynch analyst, expects revenues from the lottery business to grow 20% a year through the end of the decade. This year and next, Florida, Wisconsin and Minnesota may join in.

"With that," Stern said, "we see continued growth for us."

GTECH'S CONTRACTS

GTECH has landed computerized lottery contracts in these areas:

Arizona, California, Connecticut, D.C., New Jersey, New York, Ohio, Rhode Island

The company also has contracts abroad:

Canadian regional lotteries Australian lotteries in Victoria and South Australia

Singapore lottery

Times staff writer Paul Richter contributed to this story.

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