Most reading this will be familiar with Powerball. For those that aren’t, it is the multi-state US lottery game that regularly pays out tens, if not hundreds, of millions of dollars to a select few US citizens, based on twice weekly draws. It is a household name in North America, and it is playable in 44 of 52 states.
What many people aren’t familiar with, however, is the game’s history, and why it was set up.
As a potted introduction, it began with the introduction of a non-profit, government benefit association called the Multi-State Lottery Association (MUSL) back in 1987. The goal of the formation was to facilitate the operating of lottery games that crossed state borders – something that, prior to the association’s creation, wasn’t legally viable. Needless to say, it worked. The MUSL was (and still is) able to serve as a sort of central governing body through which ticket buyers sellers in different states in the US can contribute to a pooled jackpot, which is then shared among a number of winners as per the lottery draw results.
What’s the relevance of this?
Well, before we get in to that, here’s another quick (but pertinent) fact:
Indian reservation gambling generates more income than Atlantic City and Las Vegas combined. In 2009, this totaled $26.5 billion in revenue from 425 facilities, run by 233 tribes in 28 states. Tribes receive $4 of every $10 that Americans wager at casinos.
Indian reservation gambling began in the 1970s when the Seminole tribe in Florida opened a bingo operation, which was against Florida law at the time. It became a tourist hit, and unsurprisingly, the authorities tried to shut the operation down. A flurry of lawsuits followed, but in 1979, the Supreme Court ruled that the State did not have the right to regulate Indian reservation activities, nor could they tax reservation occupants.
Within a decade, in what’s called the Cabazon Decision, the Supreme Court ruled that as long as a form of gambling is legal in the state where the reservation is located, the state can’t regulate activities on the reservation. This formed the basis of what’s called the Indian Gaming Regulatory Act (IGRA). This Act essentially stipulates that reservations confer with the state before offering any games that would be played against the casino such as slots or blackjack tables.
And here’s where Powerball comes in to the equation. As things stand, there are no cross tribal border lottery-type games that conform to tribal rules and regulations under the IGRA. This isn’t for a lack of trying, however.
As per this New York Times article, back in 1995, The Coeur d’Alene Indian tribe of Idaho tried to create a national lottery that would be the first in the country in which buyers could pick up tickets by using a toll-free telephone number and a credit card. It was called the Indian National Lottery, and began with a jackpot of $50 million, with estimates that it would raise $200 million annually for the tribes.
It didn’t work out that way, however. The problem? The ticket purchasing process. State and Federal gaming laws prohibit tribes from operating beyond the boundaries of their reservations. The Coeur d’Alene tribe lives on a small reservation in northern Idaho. As such, it was unable to sell tickets to purchasers, even over the phone.
For more than twenty years, this glaring opportunity – to run a cross tribal border lottery type game capable of generating hundreds of millions of dollars in revenues – has gone unrealized, having been stymied by regulation.
Someone is about to have another go at tackling the issue, however, and not only that, but there’s a public market exposure to the entity that’s trying.
A company called Bingo Nation Inc (OTCMKTS:BLTO), through a collaboration with the above mentioned Coeur d’Alene tribal authority (yes, the same ones who tried back in 1995) have just enacted what’s called the Bingo Nation Network Authority Act (BNNAA), and in turn, created an entity called the Bingo Nation Network Authority. The remit of the BNNA is to fill the role of a business entity, with the purpose of acting as the central game operator, contracting with other participating Indian Tribes to distribute and operate a cross border game.
Take a look at the image below, it illustrates the positioning of the BNNA in the cross border setup:
Image Source: Bingo Nation
As illustrated, the BNNA serves in a central position between the customer facing side of the gaming platform (the technology, the production and broadcasting elements and the advertising side of things) and the participating tribes. It’s also governed by the Bingo Nation Advisory Board, which is the Advisory Board of the eponymous public company tickered above.
So how is this different to what’s been tried, and has failed, in the past?
Well, it’s not rooted in a lottery draw – that’s a key difference. Why? Because it affords the operators an opportunity to circumnavigate the ticket purchase process that proved to fall foul of the Federal gaming regulations at the end of last century. Instead, it’s presented as a bingo type game, and participants buy tickets from local vendor kiosks positioned – and here’s the kicker – within the borders of their respective (and participating) tribes.
The kiosks issue a ticket to the buyer, and the buyer has a few opportunities to win based on proprietary (and, as per this recent announcement, Indian Gaming Authority compliant) algorithms. There’s an instant win option, which is proving to be favorable among younger players in more traditional type lottery gaming across the US, as well as a weekly draw based win option, rooted in a Bingo Nation produced broadcast.
The numbers are structured as follows: 50% of the ticket revenue will pay for the gaming pot, and it’s from this pot that players will draw winnings. A 75% net gaming revenue share (so the assumption here is that this is 75% of the remaining 50%, after the winnings pot is subtracted from total revenues) will go to the participating Tribes. The remaining 25% will go to Bingo Nation – and therein lies the investment opportunity.
The company expects to generate weekly network wide sales exceeding 15 million game cards and $30 million in weekly revenues, with a corresponding $15 million weekly prize pool. Of the remaining $15 million, 75% ($11.25) will go to the Tribes, and $3.75 million will go to Bingo Nation. Multiplied out across the year (52 weeks) that’s $195 million in potential annual revenues – assuming the company can hit its own targets. To add some perspective, the company currently commands a market capitalization of just $13.5 million.
Bingo Nation Inc: So what are the risks?
There are two primary risks, as far as we see it.
The first is rooted in uptake and acceptance. The company is being aggressive with its targets (3000 kiosk units as an initial rollout) and as-yet, this is an unproven concept. Sure, cross border lotteries exist outside of Indian regulations, but this concept (albeit in a different form) has been tried, and has failed, in the past. The setting up of the BNNA mitigates this risk somewhat, as does the bingo-type play front, but chances are we will see some degree of pushback from Federal regulators, at least initially.
The second is rooted in capital necessity. As we’ve just mentioned, the rollout is aggressive in scale, and the production of the weekly broadcast, as well as the marketing efforts that a 3000 kiosk rollout necessitates, will be expensive. This company is cash poor, with essentially no cash on hand as of the most recent financials (end 2016). This means a capital raise is going to be required if Bingo Nation wants to meet its own rollout targets, and this raise is going to impact the holdings of those that pick up an early stage exposure. Of course, the growth potential will make this risk worth shouldering for some investors, but it is a necessary consideration ahead of picking up an exposure.
There are also some convertible notes waiting to drop, that are going to add to this dilutive risk on any early stage holding. Again, not prohibitive to an exposure as things stand, but noteworthy nonetheless.
The author has no positions in Bingo Nation and does not plan to initiate any within the next 72 hours.