Q & A: Steve Saferin, MDI Entertainment

Lottery operators looking to add a little pizzazz to their gaming mix often look to MDI Entertainment for assistance. The company, founded in 1986, specializes in creating, marketing and implementing entertainment-based promotions for the worldwide lottery industry.

Since its inception, the Hartford-based company has signed contracts with more than 30 state lotteries. It has helped along a small revolution in the lottery industry, a sector that's frequently seen as stodgy and slow-moving, by helping several state lotteries implement the offering of second and third-chance lottery games over the Internet. This could be the first step to online ticket sales, although MDI President Steve Saferin says such a development is still probably a few years off.

Nonetheless, anything that involves mixing gambling-type activities and the Internet is a bold step in the United States, and MDI is helping bold steps get taken. IGN recently spoke with Saferin to get the latest news about what's happening at MDI. Here's what he had to say. . .

IGN: MDI was involved in a deal with The Lottery Channel that eventually fell through. Can you provide some background on what happened?

Steve Saferin: There were certain conditions that were necessary to be accomplished for closing and they weren't accomplished. One of the major conditions was that NBC, which is a part owner of The Lottery Channel, was going to put about $10 million in the deal and they backed away from doing that. I think it was partially because of market conditions and the problems they had at NBCi. I actually met with people from The Lottery Channel this week to talk about how we might do some things together. In the meantime, since then, we entered into an agreement with eLottery and that deal is ongoing.

IGN: What does the deal with eLottery involve?

SS: eLottery is helping us execute the Internet strategy we have developed the last year or so. We call it the Internet Platform. We have 35 different brand names that we represent to the lottery industry (Wheel of Fortune, Harley Davidson, six different Nascar drivers and Spam). For each of those brands we are developing an Internet component where a lottery player who buys tickets to these games at the regular brick-and-mortar retailer can, depending upon what the lottery wants to do, register for a second-chance drawing. All of our games have the second-chance drawing component where players send in the non-winning tickets for a chance to win merchandise related to these various brands.

So, that ends up costing them $.34 every time they send it in through the mail. One of things the Internet platforms do is they allow the player to enter electronically rather than through the mail. That's much more convenient for the player and it seems to have spurred entries in the one lottery where it's happened so far.

Another function of the Internet platform is a sort-of third chance game. If they don't win cash on the ticket and they don't win in the second-chance drawing, there is yet a third chance they can participate in. This takes on a variety of forms: It can be a trivia contest, it can be a game or it can just simply be a "Enter here and if we draw your name in this third-chance, you'll win something."

There'll also be information and trivia about the brand, which is present on these sites, which gives you information about the various brands. There's also a store where you can use your non-winning lottery ticket for some type of discount or for free shipping and purchase Elvis Presley merchandise or Harley Davidson or Spam merchandise, etc. That's real important because I continue to believe that one of the problems with Internet plays is that they don't have real revenue models. I think that this store could turn out to be a real, legitimate revenue model for us, because what we have, I think, is a very interested and motivated consumer. They cared enough to buy, say, a Spam ticket, they came back and logged onto the site to either enter the drawing or check something else to do with Spam. So, it's not that great of a leap to expect that they might be interested in buying some type of Spam merchandise if the price is right.

One of the final functions of the Internet platforms will be a link directly to the official website of whatever the brand is. (For an example of the MDI Internet platform, check out www.hoosierlottery.com and click on the Spam icon.)

Interestingly, we're getting about 35 percent of the second chance drawings coming in over the Internet., which is much higher than I would have expected. We had about 15,000 entries for the first drawing and about 13,000 entries for the second drawing--something like that.

I would say by the end of this calendar year we will probably have about 15 or 20 of these second chance Internet platforms up and running.

IGN: Have you run into any problems setting up these second and third-chance games over the Internet?

SS: No. . . Well, that's a very good question. I said no because nobody in any of these states complained about it. There have been states that don't seem to want to do it yet. I would say that states that don't want to do it, one of the reasons they don't want to do it is that they aren't sure if they want to get that intimate with the Internet yet.

IGN: Have any of the states you've been talking with indicated that they might be interested in selling the actual tickets over the Internet?

SS: No. Intellectually, one would say that it's got to happen eventually. Provided Congress doesn't pass some kind of law prohibiting it like they almost did last year. From what I hear, it's less likely that it's going to happen than it was last year.

I continue to think that it's at least a couple years away at the earliest--if it happens at all. Even then, it's unclear how it's going to happen if it would happen--whether lotteries would do it themselves or whether they would go out to a third party to do it for them, I just don't know.

The interesting thing about the lottery business is that the prospect of selling tickets over the Internet remains a very daunting one for political reasons primarily. Governors don't want to expand gambling and they consider Internet lotteries as expansion into the home. But, with that said, everybody recognizes the value of the Internet and that lotteries need to take advantage of it. So they are looking to try to take advantage of it for sales and marketing ways, not to sell tickets but ways to do research, to market games, to allow customers to enter second chance drawings.

IGN: Last year the Iowa State Lottery began offering Treasure Tower, a CD-ROM interactive lottery game from Loto-Quebec. Has MDI considered developing something similar? (IGN takes an in-depth look at this game in Loto-Quebec Sets the Stage for Mass Distribution of Interactive Lottery Games.)

SS: We have talked about taking some of our brands and developing a CD-ROM game around them. We haven't spoken specifically with Loto-Quebec about it, but we are looking at some opportunities in that respect. We can see how a motorcycling game or some type of Wheel of Fortune game could be really appealing, so we are looking at it.

IGN: Is this something MDI would do on its own or in conjunction with another company?

SS: We clearly wouldn't do it on our own; we'd need a game developer for it for sure. Assuming we were to go forward with it, we would probably do it with a game developer and Scientific Games would do the printing of the tickets and etc.

IGN: Recently there has been a number of news reports highlighting the declining income various state lotteries are generating. In your opinion, what are the biggest issues facing the lottery industry?

SS: You've got what has become a very mature product, which are lottery tickets. They've been around a long, long time now. You've got tremendously increased competition, not only for the entertainment dollar, but also for the gambling or gaming dollar. So, I think those are two big issues. Plus, you've got an aging and shrinking player base, where players are getting older and because they're getting older, some of them are dying. And there are less of them because lotteries have not been as successful as they would care to be in attracting younger players. In a way, that's sort of the foundation of MDI's business, which is to acquire rights to brands that will help add some excitement to the industry. These are some things that will spruce it up a little bit--because these are well-known brand names, entertainment properties, cultural icons--and will also, to a large degree, appeal to a little bit younger demographic. I think that's the problem: People are bored, there's not enough excitement in it and they've got something else to do with their money.

IGN: You recently released your second-quarter and six-months reports which looked pretty good. As part of the report, you said you've got a backlog of $16 million in contracts. What do you see happening during the upcoming months?

SS: We're releasing a preview of our latest quarterly report, in which we'll report about $3.1 million dollars in sales and about over $650,000 in EBITDA and over $550,000 in net profits. That'll be our biggest quarter ever. We'll be forecasting record revenues and earnings for the year.

We've been working really hard. We've reorganized our marketing and sales team; we've added some people. Our games have been performing better and better, this Internet thing adds a little spark to them and makes it more interesting for lotteries. A lot of things have been going right lately, so we're keeping our nose to the grindstone to do what we can to grow the company.

IGN: What's your plan to grow the company?

SS: There's a couple different plans. One is to sell more games to our North American customers, and we think we've only really just begun to tap into this market. I continue to believe that we can grow this business with the core North American business in the $50 to $60 million range a year. It's going to take work and it's going to take us getting some new brands that we are currently talking to. I'm fairly optimistic that we can do that, but it's going to take a lot of hard work.

A second way to grow the business is to expand outside of North America. We are beginning to do that now. This New South Wales contract (Ed. Note: On March 26 MDI announced it had signed a deal introducing the Elvis Presley instant lottery game to the New South Wales state lottery.) is our first contract outside North America. We have been looking for brands that have international appeal. Elvis is clearly one of them; the Hollywood sign and Hollywood Walk of Fame is another. Betty Boop, which we've just negotiated international rights for, is a third. We had North American rights. Now, we are talking with some properties that primarily have offshore appeal. We're in negotiations for the World Cup and also the Tour de France.

We're going to continually look at ways to make money off the Internet. If these e-commerce stores can perform reasonably well, that could generate significant additional dollars to our bottom line. We already have the infrastructure to source merchandise and fulfill it, because that's what we do with lotteries and prizes. To do that with merchandise players would buy was a really easy thing for us to do. That could possibly be as big as our core business. We don't know and until we have more experience we're not going to say for sure.

IGN: MDI's stock price has fluctuated greatly over the past 52-weeks, ranging from 25/32 to 10-1/16. Currently it's valued around $2. To what do you attribute this wide-range in valuation?

SS: Well, first of all, it went way up on the merger with The Lottery Channel, ridiculously high. I loved it; I've got 4 million shares, but it was ridiculous. Then it started to fall back, and it continued to fall back. We did not have a good year, last year or the short seven-month year that ended December 31. The financial results weren't good at all, although we kept reporting increasing contract backlog. And then, near the end of the year there's this tax-loss selling that goes on, so the stock sank below a buck for a short time. Now that's over; we've been putting out a lot of good news. People are anticipating good news for the first quarter. We've got new brands. We have our first international contract. I think for the people who are listening, it's a small audience, but the news is pretty good and people are pretty excited.

IGN: Where do you see your stock price going this year?

SS: It's hard for me to say for sure. If we perform as projected to perform, this should be a $4 to $5 stock. That's my feeling, and I think we can get there.