Ex-Lottery Chief Believes He’s Left Behind a Safe Bet

As he packed his bags and headed off to seek new challenges a few days ago, California’s departing lottery director, Mark Michalko, might have been a little disappointed, but he said he wasn’t disheartened.

Lotto 6/49--the legalized numbers game he launched with a lot of hoopla last fall amid promises that it would boost flagging interest in the state’s then year-old lottery--hasn’t produced as well as originally expected. Overall lottery sales are down and continuing to drop.

But Michalko said these disappointments are ending; that the lottery has simply “matured and stabilized,” that a foundation has been laid on which the California Lottery will build until it is the most successful in the world.

Experts--among them Ralph Batch, a director of the Maryland-based Public Gaming Research Institute, a private organization that does consulting and advisory work for state lotteries and other gambling interests--say Michalko could well be right.

“Numbers games are not that well known in California,” Batch said. “But from everything I’ve learned, Michalko has built a very good base on which to expand in the near and far future. I think California will do very, very well.”

Michalko has left his $82,117-a-year job as director of the California Lottery to help set up a consulting firm in Texas. The firm hopes to help other states establish lotteries and help existing lotteries solve problems.

There is more to the new job than the promise of making more money, Michalko said. There’s the challenge of starting up something new.

That’s what the then-31-year-old did two years ago when he left his job as legal consultant to the Ohio Lottery to help California launch the lottery that voters had authorized here in 1984.

The California Lottery got off to a roaring start on Oct. 4, 1985, when the public was invited to begin playing the first in a series of so-called “instant games,” in which the purchaser need only scratch off the surface of each $1 ticket to determine whether it is a winner. Sales for the first month totaled $310.2 million.

But as the months passed, the novelty began to wear off and public enthusiasm began to wane. Total sales dropped to $277.9 million in November, 1985, and $226.9 million in December.

While new instant-game formats occasionally caused brief upsurges, total sales in September, 1986--the last full month of the lottery’s first year--were only $79.4 million.

Then came Lotto 6/49, the computerized game in which gamblers pick six numbers between 1 and 49, with the winning combinations picked in televised drawings every Saturday night.

Lottery Prediction

Michalko predicted at the time that Lotto 6/49 would reverse the decline, with eventual combined annual games sales here of $3 billion or more, making California’s the biggest lottery in the world.

Although sales continued to drop through October, 1986, they climbed in November back up to $135.8 million. And although December was off a bit, to $132.9 million, January, 1987, was up again, to $150.1 million.

But the decline then resumed in earnest.

Sales eroded erratically during the spring, with sales in June--the last full month for which figures are available--down to $113.0 million.

And Michalko admits now that Lotto 6/49 hasn’t lived up to his hopes--or his predictions.

“When you look at other states’ lotto games at a comparable point--on line for about eight months--their weekly per capita sales average is about 23 cents,” he said. “Ours is nearly 50 cents, so we’re better than double the average.

“But we had projected that we would be about three times their average, or about 69 cents. We didn’t make it.”

Reasons Lottery Fell Short

Michalko said there are two reasons why Lotto 6/49 fell short of his expectations.

The first, he said, is delays in installing the computer terminals that about 6,500 Lotto 6/49 retailers use to sell and record customers’ bets. He placed the blame largely on his administration’s failure to anticipate how long the start-up would take.

The second reason why Lotto 6/49 fell short is bad luck, Michalko said.

He explained that to attract a lot of players, Lotto 6/49 has to offer large jackpots. And to offer large jackpots, there have to be a lot of “rollovers.”

A rollover occurs when no one wins one of the Lotto 6/49 prize categories in a given week. When that happens, all the prize money in that category is carried forward, or “rolled over,” to the next week’s jackpot.

Gargantuan Proportions

Experience in other states showed that the jackpots themselves are frequently rolled over, resulting, eventually, in jackpot payoffs of gargantuan proportions. The record is $41 million in New York.

For some reason, that sort of thing hasn’t happened here yet.

“The jackpot keeps getting hit, so we aren’t getting the rollovers we had anticipated,” Michalko said. “We’ve had a jackpot of about $18 million . . . but we haven’t had the ‘megajackpot’ yet, the kind that causes ‘lottomania.’ ”

Michalko said the relatively slow sales in this, the second year of the lottery, mirror a trend experienced by lotteries in other states.

“Historically, the second year’s always the most difficult year, because the instant games, which start out high, have begun to decline and (the lotto games) have not begun to build enough to offset that,” he said. “You’re kind of in a valley between two peaks--the peak of the first year and the peak of the third year, where lotto and other (computerized) games really take off.”

$2 Billion in First Year

California lottery sales the first year totaled a little more than $2 billion--a record for North America and enough to tie for third best in the world. Michalko said this year’s total should be about $1.7 billion, but “year three will be over $2 billion, at least equal to what you saw in year one, and, hopefully, a little bit better.

“By year four and year five, there’s no reason we can’t be over a $3-billion-a-year company,” he said. “That would make us the largest in the world.”

While instant game sales have continued to decline since their inception in October, 1984, Lotto 6/49 sales have inched steadily up since the first week’s sales of $6.3 million last October, topping out at $13.7 million in the last week of June.

Lottery officials deny that recent changes in the lottery’s television advertising campaign reflect any sort of desperate effort to boost sales.

‘Strike-It-Rich’ Approach

When the lottery began in 1985, the ads emphasized the fun of playing and the fact that 34% of the proceeds go to California schools. Today’s ads use more of the “strike-it-rich” approach favored in other states.

Michalko minimizes this shift, saying it occurred largely because of criticism that the lottery was overemphasizing the benefits to schools.

“There are only three things you can talk about,” he said. “Either ‘It’s fun to play,’ or ‘You’re going to make a lot of money’ or ‘It benefits the schools.’

“We have been chastised over the months by people in the Legislature, people in the educational community . . . who say, ‘You guys are giving the impression that the lottery is curing all of education’s ills.’ That made us gun shy.

“OK, now we can’t talk too much about schools, so that leaves us ‘fun’ and ‘winning.’ What we’ve tried to do is merge those two elements in such a way that we can do it tongue-in-cheek.”

Commercial Cited

He cited, as an example, the now familiar television commercial showing a planeload of English butlers arriving in California to serve new millionaires--the big lottery winners.

“We’re joking,” he said. “I don’t think we overemphasize the winning part. . . . If we did a commercial that showed a pile of money, as I’ve seen in some other states, or an exploding bank vault where suddenly all the money bursts out, well, that would be different.”

Brad Fornaciari, an advertising executive who has stayed with the California Lottery through its changes in agencies, agreed with Michalko that the campaign is still “soft-sell” rather than “hard-sell.”

Fornaciari said surveys show the current balance of fun and winning reflects the way the consumer views the lottery.

Michalko said he’s comfortable with the advertising campaign and gratified by his accomplishments with the lottery.

‘Not as Challenging’

“But it’s not as challenging as it was in the beginning,” he said. “The challenge of creating this organization is what brought me here.”

He said the need to create something new is what prompted him to join with several other former lottery officials to form the management consulting group that they are calling Travis Enterprises Inc.

His partners, thus far, include Joan Zielinsky, a former director of the New Jersey Lottery and Jim Holmes, former director of the Missouri Lottery.