by Sam Harnett
It's been a rough year for Zynga. Faced with plunging stock and revenues, the San Francisco-based social gaming company laid off employees and retired some of its games. But it has a new play for the New Year: online gambling.
In a partnership with Bwin, the world's largest publicly traded online gambling company, Zynga plans to release 180 real money games in Europe during the first half of 2013. Meanwhile, it is lobbying hard to legalize online gambling in the United States, where some analysts predict they could make a killing.
Gambling might seem like a tough public relations move for a video game company—especially one known for virtual farm animals and wide-eyed cartoon characters. But gaming expert Gabe Zichermann says if you look below the surface, Zynga's move makes sense.
“Zynga's key intellectual assets are not really in spectacular content creation,” he says. “They are in platforms and scalability, [and] customer interaction.” He doesn't even think of Zynga primarily as a gaming company, but instead as an e-commerce and marketing company, and one that has many similarities with a casino.
Like gambling operations, social gaming companies function by hooking users, tracking their data, and monetizing their behaviors. Their business models looks more like a casino then a traditional console gaming company, Zichermann says. Even the products themselves at a company like Zynga have similar mechanics to casino games. Take titles like Farmville or Mafia Wars—they have random rewards and carefully timed payouts just like slot machines.
But even with all the parallels, making the transition to real money gambling for Zynga won’t be as simple as pulling a lever. Kevin Flood, an online gambling consultant, has serious doubts about Zynga's prospects. “Organizationally they aren't prepared for it,” he says.
Social gaming is a whole different ball game than online gambling. Once it starts dealing with real money, Zynga will have to handle credit card fraud, implement age restrictions, and prove that rewards in each game are truly random. Government regulators will be scouring the code of every new game version they release.
Flood says the programming process will have to function much differently then it does now. Zynga will have to spend more time on version releases and make sure all the code it produces is top notch. “You can't just iterate, iterate and dump some code out there.”
The first test of the new process for Zynga will be the United Kingdom, one of the world's biggest online gambling markets and the major target for Zynga's upcoming 180 real-money releases. Online gambling has been completely legal in there for almost eight years and the playing field is already crowded. Other social media companies have already beaten Zynga to the table, like Seattle-based Big Fish.
“What we are seeing in the UK is really encouraging,” says Carey DiJiulio, general manager of Big Fish Casino, the company's flagship game. “We have a slot machine live that we launched with in October. We added two more this week.”
Big Fish began offering real-money games in the United Kingdom by partnering with Betable, a San Francisco start-up that handles regulatory issues for social gaming companies wanting to jump into online gambling.
Betable CEO Christopher Griffin says Zynga will have to change radically to compete with this flood of younger, more flexible start-ups: “For Zynga to really make a move in the real money space they would either have to work with us or effectively become a start up all over again. That's how difficult and how much a paradigm shift real money is from what they do.”
Kevin Flood sees Zynga's foray into Europe as mainly a way to prepare for the United States, which has the potential to be the world's largest online gambling market. He thinks with its brand and user base, Zynga's poised to make a killing here. “If they are marginally competent and that real money gaming works to a certain degree, I don't know if anyone is going to stop them.”
Right now, the U.S. market is far from a sure bet. The Department of Justice in December 2011 issued a ruling that allows states to legalize and regulate online gambling. So far, only Nevada and Delaware have done so.
Gerard Cunningham, the founder of online casino company Koolbit, predicts more states will soon legalize, and that eventually we will end up with a patchwork of different rules and regulations across the country. That’s already true of online horserace betting. “We will see some states passing poker, some doing slots, some not,” he says. “It is going to be very, very complicated.”
That complicated patchwork of states will be a regulatory nightmare and will limit the market for games that require large pools of users, like online pokers. To achieve enough liquidity for a viable market, small states will need to sign treaties so that players can compete across borders. The goal of a big, integrated market, is one reason that Zynga is lobbying hard on the federal level.
But gambling may just be a short-term strategy for Zynga, gaming expert Gabe Zichermann speculates. Longer term he thinks Zynga is trying to shift to the mobile market and leverage its virtual currency in new ways. Perhaps in the future users will be able to make online purchases with Zynga coins or Facebook credits.
Zichermann believes this will be the next big battleground in social gaming, and a major reason why Zynga and Facebook are starting to go their separate ways. “They can't be collaborators the way that they were before,” he says. “They are going to end up brutal competitors.”
In the meantime, much will depend on how Zynga plays its online gambling cards.